In the Courts

Second Circuit Upholds Admissibility of Wiretap Evidence in Securities Fraud Convictions

On July 1, 2013, the Second Circuit upheld the convictions of Zvi Goffer, Michael Kimelman and Craig Drimal for conspiracy to commit securities fraud under 18 U.S.C. ' 371 and securities fraud in violation of 15 U.S.C. ” 78j(b) and (ff), despite the defendants' challenge to the Southern District of New York's admission of wiretap evidence at trial. United States v. Goffer, No. 11-3591, 2013 WL 3285115, at *1, 13 (2nd Cir. July 1, 2013). On appeal, the defendants argued that the admission of wiretap evidence was unlawful because securities fraud is not a predicate offense to obtain wiretap authorization under Title III of the Omnibus Crime Control and Safe Streets Act of 1968, 18 U.S.C. ' 2510. Id. at *4. Additionally, they asserted that because the evidence obtained through the wiretaps was not intercepted inadvertently to an otherwise lawful wiretap, it should have been excluded. Id. The Second Circuit rejected both arguments. Id.

The defendants' convictions were based on a “large-scale cash-for-tips scheme” that took place between 2007 and 2008, in which former Ropes & Gray attorneys Arthur Cutillo and Brian Santarlas obtained material non-public information and shared it with Jason Goldfarb, a Brooklyn attorney and law school friend of Cutillo's. Id. at *1, 13. Goldfarb passed the information along to Goffer, who then worked at Galleon Group, a hedge fund management company led by the now incarcerated Raj Rajaratnam. Id. at *1; see United States v. Rajaratnam, No. 11-4416, 2013 WL 3155848 (2nd Cir. June 24, 2013) (upholding convictions of conspiracy to commit securities fraud and securities fraud). After receiving and sharing the information, Kimelman, Drimal and Goffer benefitted from trades of upwards of $10 million, which included the acquisitions of P.F. Chang's, Clear Channel, Kronos, Inc., Hilton Hotels and 3Com. Goffer at *1-3.

In addressing the admissibility of the wire tap evidence, the Second Circuit cited the analysis of the Southern District of New York in United States v. Rajaratnam, No. 09 Cr. 1184, 2010 WL 4867402, (S.D.N.Y. Nov. 24, 2010), holding that wiretap evidence is admissible in a securities fraud case where a wiretap is lawfully obtained based on an application asserting wire fraud as a predicate offense. Goffer at *4. The court was not persuaded by the argument that the application was inappropriate because the government was aware of the “probability of intercepting” evidence of other offenses, explaining that “Congress did not intend that a suspect be insulated from evidence of one of his illegal activities ' merely because law enforcement agents are aware of his diversified criminal portfolio.” Id. (citing United States v. McKinnon, 721 F.2d 19, 23 (1st Cir. 1983). Therefore, incidental interception of communications uncovering securities fraud was lawful. Goffer at *5.

'Wiretaps may only be authorized to investigate specific, enumerated offenses and securities fraud is not among them. 18 U.S.C. ' 2516(1). In Goffer, the government indicated in its wiretap application that in addition to wire fraud, which is a predicate offense under section 2516, it expected to uncover evidence of securities fraud. Id. at *5. According to the Second Circuit, as long as the government has a “bona fide purpose” of prosecuting wire fraud, and is not using wire fraud as a “subterfuge for gathering evidence of other offenses,” the wire tap authorization is obtained in good faith and the government can use any other evidence of securities fraud it happens to intercept. Id.; Rajaratnam at *6.

In the Courts and Business Crimes Hotline were written by Holly Trogdon and Timothy Geverd, respectively. Both were summer associates at Kirkland & Ellis LLP, Washington, DC.

'

'

Second Circuit Upholds Admissibility of Wiretap Evidence in Securities Fraud Convictions

On July 1, 2013, the Second Circuit upheld the convictions of Zvi Goffer, Michael Kimelman and Craig Drimal for conspiracy to commit securities fraud under 18 U.S.C. ' 371 and securities fraud in violation of 15 U.S.C. ” 78j(b) and (ff), despite the defendants' challenge to the Southern District of New York's admission of wiretap evidence at trial. United States v. Goffer, No. 11-3591, 2013 WL 3285115, at *1, 13 (2nd Cir. July 1, 2013). On appeal, the defendants argued that the admission of wiretap evidence was unlawful because securities fraud is not a predicate offense to obtain wiretap authorization under Title III of the Omnibus Crime Control and Safe Streets Act of 1968, 18 U.S.C. ' 2510. Id. at *4. Additionally, they asserted that because the evidence obtained through the wiretaps was not intercepted inadvertently to an otherwise lawful wiretap, it should have been excluded. Id. The Second Circuit rejected both arguments. Id.

The defendants' convictions were based on a “large-scale cash-for-tips scheme” that took place between 2007 and 2008, in which former Ropes & Gray attorneys Arthur Cutillo and Brian Santarlas obtained material non-public information and shared it with Jason Goldfarb, a Brooklyn attorney and law school friend of Cutillo's. Id. at *1, 13. Goldfarb passed the information along to Goffer, who then worked at Galleon Group, a hedge fund management company led by the now incarcerated Raj Rajaratnam. Id. at *1; see United States v. Rajaratnam, No. 11-4416, 2013 WL 3155848 (2nd Cir. June 24, 2013) (upholding convictions of conspiracy to commit securities fraud and securities fraud). After receiving and sharing the information, Kimelman, Drimal and Goffer benefitted from trades of upwards of $10 million, which included the acquisitions of P.F. Chang's, Clear Channel, Kronos, Inc., Hilton Hotels and 3Com. Goffer at *1-3.

In addressing the admissibility of the wire tap evidence, the Second Circuit cited the analysis of the Southern District of New York in United States v. Rajaratnam, No. 09 Cr. 1184, 2010 WL 4867402, (S.D.N.Y. Nov. 24, 2010), holding that wiretap evidence is admissible in a securities fraud case where a wiretap is lawfully obtained based on an application asserting wire fraud as a predicate offense. Goffer at *4. The court was not persuaded by the argument that the application was inappropriate because the government was aware of the “probability of intercepting” evidence of other offenses, explaining that “Congress did not intend that a suspect be insulated from evidence of one of his illegal activities ' merely because law enforcement agents are aware of his diversified criminal portfolio.” Id . (citing United States v. McKinnon , 721 F.2d 19, 23 (1st Cir. 1983). Therefore, incidental interception of communications uncovering securities fraud was lawful. Goffer at *5.

'Wiretaps may only be authorized to investigate specific, enumerated offenses and securities fraud is not among them. 18 U.S.C. ' 2516(1). In Goffer, the government indicated in its wiretap application that in addition to wire fraud, which is a predicate offense under section 2516, it expected to uncover evidence of securities fraud. Id. at *5. According to the Second Circuit, as long as the government has a “bona fide purpose” of prosecuting wire fraud, and is not using wire fraud as a “subterfuge for gathering evidence of other offenses,” the wire tap authorization is obtained in good faith and the government can use any other evidence of securities fraud it happens to intercept. Id.; Rajaratnam at *6.

In the Courts and Business Crimes Hotline were written by Holly Trogdon and Timothy Geverd, respectively. Both were summer associates at Kirkland & Ellis LLP, Washington, DC.

'

'