Remember the children’s game Telephone? One kid whispers something in another kid’s ear, the second kid turns around and whispers what she heard to the next child, and so on down the line. At the end, the last one to receive the whispered message says aloud what she heard, the kid at the start of the chain announces the original phrase, and everyone laughs because the message was inevitably mangled as it was passed along. That’s why courts have a rule barring hearsay. Witnesses can testify about conversations they participated in, but they can’t generally tell jurors what they heard secondhand about discussions they weren’t directly involved in, because hearsay isn’t considered sufficiently reliable.
The same principle applies when prosecutors obtain wiretap evidence of phone conversations. Obviously, wiretaps provide a record of direct conversations. But when one person on a recorded phone call tells another about a conversation he had with someone else, is that evidence or hearsay?
For Rajat Gupta, the former McKinsey chief and Goldman Sachs director accused of passing tips to convicted inside-trader Raj Rajaratnam, the hearsay rule could well be the difference between acquittal and a long prison sentence. As I’ve previously reported, prosecutors from the U.S. Attorney’s office in Manhattan are relying on tapes of three conversations between Rajaratnam and his colleagues at the Galleon Group hedge fund to link Rajaratnam’s illegal trades with tips he allegedly received from Gupta. The government conceded in a brief filed earlier this month that those tapes are the best evidence it has – in a case in which there’s no proof Gupta profited from his alleged insider trading – that Gupta actually passed confidential information to the hedge fund billionaire. Without Rajaratnam’s fleeting recorded references to tips about Goldman Sachs, the government’s case against Gupta is all inference, requiring jurors to draw lines between phone records and Rajaratnam trades.
The prosecutors, Assistant U.S. Attorneys Reed Brodsky and Richard Tarlowe, don’t assert that the wiretap evidence is anything but hearsay. But they argued in their brief that the recorded conversations fall under exceptions to the bar on hearsay evidence in the federal rules of evidence. The government has asked U.S. Senior District Judge Jed Rakoff for a pretrial ruling that the tapes are admissible because they contain statements that were against Rajaratnam’s interests and were made in furtherance of a conspiracy involving both Rajaratnam and Gupta. Prosecutors also argued, in a bit of circular reasoning, that Rakoff should admit the hearsay evidence because the government really needs it to prove its case. The tapes “are the most probative evidence available that Rajaratnam traded Goldman shares based on a tip from Gupta,” the government’s brief said, citing a rarely invoked “residual exception” to the hearsay rule. “The introduction of these statements would be consistent with the rules of evidence and advance the interests of justice.”
Late Friday, Gupta’s lawyers at Kramer Levin Naftalis & Frankel filed their 41-page response to the prosecutors’ hearsay brief. It’s a do-or-die filing that argues against admission of the tapes on both procedural and substantive grounds. This is as good an examination of the hearsay rule, and its application in the 2nd Circuit Court of Appeals, as you’re going to find.