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Rajaratnam Accuses Prosecutors of Misleading Judges Who Allowed Wiretaps

Date: Wednesday, July 28, 2010
Author: David Glovin, Bloomberg

Galleon Group LLC co-founder Raj Rajaratnam’s attorney said prosecutors misled the judges who authorized secret wiretaps that form the basis of a federal insider-trading probe.

Before arresting Rajaratnam last year, prosecutors secretly recorded roughly 2,400 conversations that the hedge fund executive had with more than 130 friends, business associates and alleged accomplices. Prosecutors have said their evidence against Rajaratnam will include testimony from government witnesses who were heard swapping illegal stock tips with Rajaratnam as well as the recordings themselves.

In Manhattan federal court today, Rajaratnam’s attorney John Dowd argued that prosecutors violated federal law by misleading judges who allowed the secret wiretaps about the background of Roomy Khan, the ex-Intel Corp. executive whose disclosures prompted the investigation. He said an FBI agent omitted or distorted important evidence in order to win permission to tap Rajaratnam’s phone.

“These are facts that any judge would want to know,” Dowd told U.S. District Judge Richard Holwell, who is presiding over the case. The arguments were continuing this afternoon.

Rajaratnam, 53, is accused of using secret information from insiders to make millions of dollars on illegal stock trades. Danielle Chiesi, a former consultant at New Castle Funds LLC who was arrested with Rajaratnam, is also seeking to exclude the wiretaps. Both have denied wrongdoing.

21 Defendants

The case has led to charges against 21 people. Twelve pleaded guilty, and several agreed to testify against Rajaratnam. He faces more than 20 years in prison if convicted of securities fraud and other crimes.

The prosecution is the first in which the government has used secret intercepts of telephone calls to investigate and prosecute insider trading. A prosecutor said after Rajaratnam’s arrest in October that the wiretaps show him engaging in “a veritable smorgasbord of insider trading.”

Dowd said in court that prosecutors and a Federal Bureau of Investigation agent concealed Khan’s criminal record, her seven- year history of cooperating with the government, her “flip- flopping” during interviews and her efforts to escape punishment. Had prosecutors made those disclosures, the wiretaps wouldn’t have been approved, he argued in court.

‘Some Force’

“There’s some force to defendant’s arguments,” Holwell said, while adding that he need not exclude the recordings at the trial even if he finds that the government should have been more forthcoming in its wiretap applications.

Assistant U.S. Attorney Reed Brodsky told Holwell that the legal threshold for prosecutors to obtain a wiretap is a “relaxed” one. He said the judges who weighed the wiretap requests were dealing “in probabilities,” not “certainties,” that Rajaratnam had broken the law.

Brodsky also accused the defense of engaging in a “hyper- technical” legal analysis and of advancing an “absurd” argument. Responding to Dowd’s claim that the prosecutors failed to disclose Khan’s prior insider trading conviction, he said the facts of that earlier case would also support the government’s wiretap request.

If Rajaratnam is able to exclude the wiretaps, defense lawyers may seek to block evidence the government developed after hearing the recordings. Even if the defense prevails, prosecutors may offer testimony from Khan, who first met with the government years before Rajaratnam was charged, and other witnesses.

Rajaratnam’s lawyers also argue that Congress never authorized the use of wiretaps, commonly employed in terrorism or organized crime investigations, in securities-fraud cases.

The case is U.S. v. Rajaratnam, 09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: David Glovin in federal court in New York at dglovin@bloomberg.net.