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New Use of Wiretaps in Insider Trading Cases

By Stanley A. Twardy, Jr. and Doreen Klein

As 2008 ended with the arrests of Marc Dreier and then Bernard Madoff nine days later, it seemed unlikely that 2009 would prove as significant. Then, on Oct. 16, 2009, federal agents arrested Raj Rajaratnam, the founder of hedge fund Galleon Group, in an alleged insider trading scheme that involved well known public companies and thus far 20 defendants, including lawyers, stock traders, management consultants, and executives inside the issuers themselves. Unlike the Dreier and Madoff cases, these arrests proved shocking not simply because highly placed members of the financial, business and legal world were seen in handcuffs, but also because of how they got there.

The Department of Justice (“DOJ”) relied heavily on wiretapped telephone conversations to build its case. According to Preet Bharara, the U.S. Attorney for the Southern District of New York, the case against Rajaratnam and his co-defendants is the “first time that court-authorized wiretaps have been used to target significant insider trading on Wall Street,” and all defendants charged “were ultimately caught committing their alleged crimes over phones that [law enforcement was] listening to.” The technique proved fruitful: in addition to the 20 arrests from across the country, DOJ suggests that more are forthcoming. As of this writing, five hedge fund managers and an attorney have pled guilty.

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