Raj appeal could give wiretaps needed airing

May 11, 2011

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Reynolds Holding

Wiretaps — once used mainly to ensnare the mob — all but sealed Raj Rajaratnam’s insider trading conviction in New York on Wednesday. But the FBI’s dodgy tactics in getting them raise the question of whether the ends justified the means. The Galleon Group founder will probably challenge the secret recordings on appeal.

In 1968, after decades of indiscriminate eavesdropping by FBI Director J. Edgar Hoover, the feds authorized wiretapping in only the most serious cases involving organized crime. Even then, it could only be used if law enforcement could show that less intrusive methods wouldn’t work.

Over the years, the list of offenses grew, but never included insider trading. Agents in the Rajaratnam case were allowed to wiretap because they started investigating him for wire fraud and money laundering — listed offenses — and ran across evidence of improper trading. They also swore that further subpoenas, interviews and other conventional tactics would be futile.

But they didn’t tell the whole story. Most significant, in getting the green light to tap key suspects’ phones they didn’t mention that the U.S. Securities and Exchange Commission had been investigating Rajaratnam for years, using with little success methods that the agents now claimed would never work. The judge in Rajaratnam’s case called it a “glaring omission” but on balance found the wiretaps were needed as evidence and refused to suppress them.

That evidence proved damning. But if the feds’ omission was so glaring, there’s a reasonable argument it shouldn’t have been allowed. Other courts have also shied away from penalizing errant wiretapping. Last month, a federal judge scolded FBI agents for “egregious” errors in recording a suspect’s “deeply personal” calls — something else they aren’t supposed to do — but refused to toss the tapes.

It’s already significant that a tool intended for nabbing dangerous thugs is now being used against potential investing miscreants. It’s easy to see why that might be necessary, especially since fraudsters are wise to the risks of using email. But judges surely still need to ensure prosecutors abide by the rules.

Rajaratnam is likely to appeal. His lawyers would probably try to get the wiretaps, and by implication his conviction, thrown out. That will at least give a U.S. court a welcome chance to clarify the limits on wiretapping investors.

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