White-Collar Wiretaps

One hedge fund executive has reportedly “instructed his colleagues to be extra careful about what they say on the phone, not because they are breaking the law, but because they are fearful that any conversation about stocks could be misconstrued.” Id.

Others may choose to meet in person instead of picking up the phone. Id. But whether the success of the Galleon case will open a floodgate of white-collar prosecutions based on wiretap evidence remains an open question. Similarly, the extent to which companies will need to change their internal controls and procedures may not be as significant as feared.

Wiretaps and Financial Crimes

Historically, law enforcement has used wiretaps primarily to aid in the investigation of narcotics trafficking and organized crime. (In 2009, 86% of all applications for wiretaps involved drug-related offenses. See U.S. Courts, Report of the Director of the Administrative Office of the United States Courts on Applications for Orders Authorizing or Approving the Interception of Wire, Oral, or Electronic Communications (2009), available at www.uscourts.gov/uscourts/Statistics/WiretapReports/2009/2009Wiretaptext.pdf.) Wiretaps and other means of electronic surveillance are particularly suited for this purpose because organized criminal groups are by nature tightly knit and they rarely create a paper trail that can be used as evidence. Corporate Counsel's Guide to White-Collar Crime (2009), available at Westlaw CCGWHCOLL ' 9:1. Electronic surveillance, therefore, is often the best way ' and sometimes the only way ' to obtain incriminating evidence against the members of the group. By contrast, financial crimes typically involve false statements in financial statements, prospectuses, disclosures and other written material, and the wrongdoers either leave behind documents, or they communicate by e-mail, instant message and other means that leave an electronic “paper trail” of incriminating evidence.

The use of electronic surveillance evidence in white-collar cases, however, is not as unprecedented as some commentators have suggested. While the Galleon case marked the first use of wiretaps in an insider trading case, federal and state law enforcement agencies have used wiretaps and undercover agents in past white-collar criminal cases, including investigations of mail and bank fraud conspiracies (U.S. Courts, Report of the Director of the Administrative Office of the United States Courts on Applications for Orders Authorizing or Approving the Interception of Wire, Oral, or Electronic Communications, 12 (2006), available at www.uscourts.gov/uscourts/Statistics/WiretapReports/2006/2006WT.pdf), trafficking in counterfeit goods, (Nicholas Schmidle, “Inside the Knockoff-Tennis-Shoe Factory,” N.Y. Times, Aug. 8, 2010, at MM38), and telemarketing “boiler rooms.”

Nevertheless, the Galleon case reflects a recent coordinated effort by law enforcement to use electronic surveillance and “organized crime” style approaches more frequently in white-collar cases. For example, in 2009, the FBI created the National Mortgage Fraud Team and began using “sophisticated investigative techniques, such as undercover operations and wiretaps” with the goal of “apprehend[ing] criminals in the commission of their crimes.” James Vicini, FBI Sets Up Mortgage Fraud Team, Uses Wiretaps, Reuters (May 20, 2009, 2:48 PM) (quoting remarks by FBI Director Robert Mueller), www.reuters.com/article/2009/05/20/us-fbi-mortgage-fraud-idUSTRE54J5RO20090520. The 2010 prosecution of Trevor Cook in Minnesota for running a fraudulent investment scheme was based in part on evidence obtained through sophisticated investigative techniques. Dan Browning and Sarah Gorvin, Minneapolis Money Manager Trevor Cook Admits to $190 Million Scam, Star Tribune (April 14, 2010, 12:20 PM), www.startribune.com/business/90751939.html. Additionally, the ongoing prosecution of 22 military and law enforcement equipment suppliers for allegedly engaging in a scheme to bribe foreign government officials relied heavily on the aggressive use of undercover law enforcement tactics. Lanny A. Breuer, Assistant Attorney General, Dept. of Justice, Financial Crisis Fallout 2010: Emerging Enforcement Trends, Address Before the Practising Law Institute (Nov. 4, 2010) (transcript available at www.justice.gov/criminal/pr/speeches/2010/crm-speech-101104.html).

Limitations

As technology advances faster than the speed of light, criminals continue to get more sophisticated in their methods, forcing law enforcement to try and keep up. While electronic surveillance, and particularly wiretaps, are a useful and compelling tool in building a case, there are legal and practical limitations that will likely prevent this tool from becoming as ubiquitous in white-collar criminal prosecutions as some have predicted.

Next month we will discuss some of the limitations on the government's ability to use wiretaps to aid in their investigations of white-collar crimes, and what in-house counsel can do to manage disclosure risks.

Jonathan B. New is a partner in Baker Hostetler's white collar defense and corporate investigations practice in the New York office and a former assistant U.S. attorney. Sammi Malek is a litigation associate in the same office. This article also appeared in the New York Law Journal, an ALM sister publication of this newsletter.

The impact of the recent conviction of Galleon Group's co-founder, Raj Rajaratnam, for insider trading has been called “seismic,” due to the novel use of wiretap evidence to bring the crime to life before the jury. Stephen A. Miller, Will There Be a 'CSI Effect' for Wiretapping?, The National Law Journal (May 23, 2011), www.law.com/jsp/nlj/PubArticleNLJ.jsp?id=1202494773565&slreturn=1&hbxlogin=1. As the recent trials of Rajaratnam, Zvi Goffer, and expert networking consultant Winifred Jiau have unfolded, the full scope of the government's wiretapping has been revealed. The government's recordings have ensnared not just traders and financiers, but also lawyers, consultants, and officers and directors of public companies. As a result, people on Wall Street may now be wondering, “is law enforcement listening?” whenever they pick up the phone, as U.S. Attorney Preet Bharara warned in announcing the arrest of Rajaratnam.

A Chilling Effect?

Indeed, many commentators have suggested that the newly aggressive use of wiretaps will have a profound chilling effect on the practices of the financial services sector. Following the revelations about the Rajaratnam wiretaps, hedge-fund managers wondered whether even legitimate exchanges caught on tape would draw scrutiny. Katherine Burton and David Glovin, Galleon Wiretaps Rattle Hedge Funds, Bloomberg (Oct. 26, 2009), www.bloomberg.com/apps/news?pid=newsarchive&sid=as8seXJpbDUY.

One hedge fund executive has reportedly “instructed his colleagues to be extra careful about what they say on the phone, not because they are breaking the law, but because they are fearful that any conversation about stocks could be misconstrued.” Id.

Others may choose to meet in person instead of picking up the phone. Id. But whether the success of the Galleon case will open a floodgate of white-collar prosecutions based on wiretap evidence remains an open question. Similarly, the extent to which companies will need to change their internal controls and procedures may not be as significant as feared.

Wiretaps and Financial Crimes

Historically, law enforcement has used wiretaps primarily to aid in the investigation of narcotics trafficking and organized crime. (In 2009, 86% of all applications for wiretaps involved drug-related offenses. See U.S. Courts, Report of the Director of the Administrative Office of the United States Courts on Applications for Orders Authorizing or Approving the Interception of Wire, Oral, or Electronic Communications (2009), available at www.uscourts.gov/uscourts/Statistics/WiretapReports/2009/2009Wiretaptext.pdf.) Wiretaps and other means of electronic surveillance are particularly suited for this purpose because organized criminal groups are by nature tightly knit and they rarely create a paper trail that can be used as evidence. Corporate Counsel's Guide to White-Collar Crime (2009), available at Westlaw CCGWHCOLL ' 9:1. Electronic surveillance, therefore, is often the best way ' and sometimes the only way ' to obtain incriminating evidence against the members of the group. By contrast, financial crimes typically involve false statements in financial statements, prospectuses, disclosures and other written material, and the wrongdoers either leave behind documents, or they communicate by e-mail, instant message and other means that leave an electronic “paper trail” of incriminating evidence.

The use of electronic surveillance evidence in white-collar cases, however, is not as unprecedented as some commentators have suggested. While the Galleon case marked the first use of wiretaps in an insider trading case, federal and state law enforcement agencies have used wiretaps and undercover agents in past white-collar criminal cases, including investigations of mail and bank fraud conspiracies (U.S. Courts, Report of the Director of the Administrative Office of the United States Courts on Applications for Orders Authorizing or Approving the Interception of Wire, Oral, or Electronic Communications, 12 (2006), available at www.uscourts.gov/uscourts/Statistics/WiretapReports/2006/2006WT.pdf), trafficking in counterfeit goods, (Nicholas Schmidle, “Inside the Knockoff-Tennis-Shoe Factory,” N.Y. Times, Aug. 8, 2010, at MM38), and telemarketing “boiler rooms.”

Nevertheless, the Galleon case reflects a recent coordinated effort by law enforcement to use electronic surveillance and “organized crime” style approaches more frequently in white-collar cases. For example, in 2009, the FBI created the National Mortgage Fraud Team and began using “sophisticated investigative techniques, such as undercover operations and wiretaps” with the goal of “apprehend[ing] criminals in the commission of their crimes.” James Vicini, FBI Sets Up Mortgage Fraud Team, Uses Wiretaps, Reuters (May 20, 2009, 2:48 PM) (quoting remarks by FBI Director Robert Mueller), www.reuters.com/article/2009/05/20/us-fbi-mortgage-fraud-idUSTRE54J5RO20090520. The 2010 prosecution of Trevor Cook in Minnesota for running a fraudulent investment scheme was based in part on evidence obtained through sophisticated investigative techniques. Dan Browning and Sarah Gorvin, Minneapolis Money Manager Trevor Cook Admits to $190 Million Scam, Star Tribune (April 14, 2010, 12:20 PM), www.startribune.com/business/90751939.html. Additionally, the ongoing prosecution of 22 military and law enforcement equipment suppliers for allegedly engaging in a scheme to bribe foreign government officials relied heavily on the aggressive use of undercover law enforcement tactics. Lanny A. Breuer, Assistant Attorney General, Dept. of Justice, Financial Crisis Fallout 2010: Emerging Enforcement Trends, Address Before the Practising Law Institute (Nov. 4, 2010) (transcript available at www.justice.gov/criminal/pr/speeches/2010/crm-speech-101104.html).

Limitations

As technology advances faster than the speed of light, criminals continue to get more sophisticated in their methods, forcing law enforcement to try and keep up. While electronic surveillance, and particularly wiretaps, are a useful and compelling tool in building a case, there are legal and practical limitations that will likely prevent this tool from becoming as ubiquitous in white-collar criminal prosecutions as some have predicted.

Next month we will discuss some of the limitations on the government's ability to use wiretaps to aid in their investigations of white-collar crimes, and what in-house counsel can do to manage disclosure risks.

Jonathan B. New is a partner in Baker Hostetler's white collar defense and corporate investigations practice in the New York office and a former assistant U.S. attorney. Sammi Malek is a litigation associate in the same office. This article also appeared in the New York Law Journal, an ALM sister publication of this newsletter.