Federal District Court Upholds the Government’s Right to Use Wiretaps to Investigate Suspected Insider Trading by Hedge Fund Manager Personnel

On November 24, 2010, the United States District Court for the Southern District of New York handed the United States Attorney’s Office (USAO) and the FBI (together, the government) a major victory in their ongoing criminal prosecution of Raj Rajaratnam, founder of Galleon Management, LP, and Danielle Chiesi, a former manager of New Castle Funds, LLC (defendants), for their alleged participation in a massive insider trading conspiracy.  In a precedential decision, the court upheld the government’s authority to secretly record phone calls under Title III of the Omnibus Crime Control and Safe Streets Act of 1968 (Title III or the Act) to investigate insider trading schemes using interstate wires, even though the Act does not specifically authorize wiretaps to investigate insider trading alone.  It also rejected defendants’ specific challenges to the government’s underlying search warrant applications, notwithstanding what it considered a “troubling” lack of government candor, because disclosure of the details “the government recklessly omitted would ultimately have shown that a wiretap was necessary and appropriate.”  As a result of its decision, the government may now present these recordings – likely the most persuasive evidence it will offer – at the trials of Rajaratnam and Chiesi, now tentatively scheduled to start on January 17, 2011.  We detail the background of the action and the Southern District’s legal analysis, primarily as it pertains to Rajaratnam’s claims, because the opinion heavily redacted the facts relating to Chiesi’s prosecution.  See also “Decision in the Galleon Matter Illustrates Application of Wiretap Law in the Hedge Fund Context,” Hedge Fund Law Report, Vol. 3, No. 41 (Oct. 22, 2010).

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