Insider trading wire taps a sign of things to come

NEW YORK Wed Oct 21, 2009 12:46pm EDT

NEW YORK (Reuters) - Federal agents have for years been tapping the cell phones of drug traffickers and mafia dons, but the latest insider trading bust shows they are now using the method to go after rogue traders and fund managers.

U.S. authorities charged Galleon Group hedge fund founder Raj Rajaratnam last Friday with making up to $20 million in profits on insider information. Key evidence came from court- approved wire taps for the first time ever in a Wall Street insider trading case.

An official government report on court-approved wiretaps shows the majority were used in narcotics cases such as the drug traffickers depicted in the popular HBO series The Wire. Some were for homicide, assault and gambling investigations.

But experts said its use in financial crime investigations should not be so surprising and there could be more as the government steps up its crackdown on insider trading.

"It's considered a very good technique for something with not a lot of physical evidence," said Steven Bellovin, a Columbia University professor.

But Jim Dempsey, vice president for public policy at the Center for Democracy & Technology, said wiretaps may be more effective in drug cases than in fighting white-collar crime because they are safer than going undercover and provide timely information such as the locations of future deliveries.

Wiretapping insider trading cases may be less effective because it is hard to sift criminal activity from a large volume of conversations. But Dempsey added that Washington policies could influence how wiretaps are used.

SUPER WARRANTS

Experts say the government has gained more authority over surveillance in the past decade, although University of Colorado Law School professor Paul Ohm said it is still difficult for officials to obtain court approval for wire taps, called "super warrants" among law enforcement officials. Court approvals require, for example, that other methods have failed or were too dangerous.

"Turning on a wiretap is considered much more invasive than the most secret traditional searches so they layer on lots and lots of additional requirements," said Ohm, who has also worked for the U.S. Department of Justice's computer crime and intellectual property section. "You have to show you've already pulled their trash and interviewed neighbors."

But once approval is granted, listening is not too hard.

Surveillance can include wiretaps on home telephones, business phones, or cellphones, although court reports show that, of the 1,891 wiretaps authorized last year, 1,793 were for wireless devices. Only 31 were for homes and even less were for business lines.

That is quite a change from 10 years ago, when U.S. judges approved more than 300 surveillance authorizations for home phones, while wireless phones were included in the category of 584 "other" locations.

The taps on Rajaratnam showed some people were worried about the possibility of calls being monitored.

"I don't like talking over cell phone on this," co-defendant Rajiv Goel, an executive at Intel Capital, was quoted as saying at one point.

The FBI targeted not only cellphones but also landlines.

"As the defendants in this case have now learned the hard way, they may have been privy to a lot of confidential corporate information, but there was one secret they did not know: we were listening," said Preet Bharara, the U.S. Attorney for the Southern District of New York in announcing the prosecutions last week.

"Today, tomorrow, next week, the week after, privileged Wall Street insiders who are considering breaking the law will have to ask themselves one important question: Is law enforcement listening?"

Wireless surveillance comes in basically two forms: picking up a radio signal or intercepting conversations through the phone company's network.

A radio signal can be difficult to intercept as it requires proximity to the target and advanced technology to decipher digitized wireless conversations.

But with court approval, authorities are able to directly access a mobile phone network. While the FBI declined to comment on the specific method used in the latest case, experts say this was the likely technique used by the FBI when it tapped Rajaratnam's cell phone, as well as the multiple phones used by Danielle Chiesi, a portfolio manager at hedge fund New Castle, who is also among those charged.

The Communications Assistance for Law Enforcement Act, enacted in 1994 and more recently updated to include newer Internet-based technology, requires that phone service providers cooperate when the FBI comes with a wiretap order.

Wiretapping can be labor intensive as agents need to listen in, not just to pick up on clues, but also to avoid violations that may lead to suppression of evidence. But experts say it may be worthwhile in crimes such as insider trading in which secret communications are a key part of criminal activities.

The authorities might also be able to take advantage of the lack of experience of white collar workers.

"The mob is skilled with this sort of thing: getting rid of old phones, getting new ones. I don't know if people who do insider trading are even thinking of that because they don't have the history of evading law enforcement," Bellovin added.

(Reporting by Ritsuko Ando; editing by Andre Grenon)