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SDNY Prosecutors to Use Wires to Nab Financial Fraud

By Lisa Brennan

This post has been updated.

When the U.S. Attorney?s Office in the Southern District of New York brought insider-trading charges last year against Galleon Group LLC founder Raj Rajaratnam based on testimony from cooperating witnesses and wiretaps of the defendant and others, it sent a shudder through Wall Street and the hedge fund industry.

Richard B. Zabel (Akin Gump)

Many of the critical conversations regarding the underlying transactions in the case were taped by confidential witnesses, according to court papers. Rajaratnam has pleaded not guilty.

So the announcement earlier this week by Richard Zabel, SDNY’s Criminal Division Chief that prosecutors will now make “aggressive use of wiretaps” in financial fraud cases should continue to keep traders and bankers on their best behavior. Zabel?s announcement was first reported in Financial Adviser magazine.

Zabel announced the change Monday in New York at a daylong white-collar conference sponsored by the Practicing Law Institute. He said 25 prosecutors now handle specialty areas including complex financial instruments, accounting frauds, Ponzi schemes and insider trading cases.

Instead of relying solely on cooperating witnesses and e-mails — a formula that didn’t work to convince jurors in the government’s case against Bear Stearns’ ex-fund managers Ralph Cioffi and Matthew Tannin — Zabel said prosecutors will make more aggressive use of wiretaps, as the taped evidence will make it less “difficult to prove.”

Rajaratnam and his attorney have fought against disclosing transcribed material on the wiretaps. The Galleon founder in March opposed the government?s request for a court procedure that would address ?the public?s right to access wiretap applications? that investigators probing him confidentially submitted to a judge.

He won a ruling earlier this year that the tapes may remain secret until a judge decides whether they may be used at trial.  Rajaratnam began a hearing this week in federal court in Manhattan attempting to convince U.S. District Judge Richard Holwell that the government misled a different judge into authorizing the wiretaps in March 2008.  He is asking to have the tapes thrown out.  Last week, a federal appeals court denied the SEC’s request for access to the wiretaps from Rajaratnam for use in its related civil suit before U.S. District Judge Jed Rakoff.

Lawyers familiar with the process leading up to a decision to use wiretaps say the white collar cases in which current SDNY prosecutors are likely to make aggressive use of wires would need to involve a lot of continuous activity, a requirement that on its face would seem to rule out accounting fraud for example, two former SDNY prosecutors said today.

In addition, before the government decides to use wiretaps in a white collar case, it must first establish that other, less intrusive methods of investigation will not suffice, SDNY alum Marcus Asner said.

“Using wiretaps is very manpower intensive and expensive,” said Asner of Arnold & Porter in New York. “But if you have an insider-tipping case with a great deal of continuous activity and a wide net of targets, it could make sense to use a wiretap.”

Zabel’s comments do not appear to be a game changer, Asner and his former prosecutor colleague said. The Galleon case would continue to be the template for future financial cases that make aggressive use of wiretaps.   “I don’t interpret Richard’s comments as meaning there will be any earthshaking change,” said Asner’s former prosecutor colleague.

Zabel and a defense lawyer in the Bears Stearns case, Susan Brune of Brune & Richard LLP in New York, also discussed the impact of the Dodd-Frank bill, specifically its new whistleblower provision that allows the Securities and Exchange Commission to give informants a cut of the proceeds from any successful prosecution. Zabel said it provides “a huge incentive for whistleblowers to come forward.”

Zabel said firms that discover a problem should make complete disclosures to the SEC to be in a more favorable position if a disgruntled employee, acting as a whistleblower, tries to make the firm?s actions look suspicious or illegal, according to Financial Adviser.

Full post as published by Main Justice on October 06, 2010 (boomark / email).