Skeptical court mulls Galleon wiretaps

NEW YORK (Reuters) - A federal appeals court expressed skepticism over whether Galleon Group hedge fund founder Raj Rajaratnam must turn over wiretap evidence to the U.S. Securities and Exchange Commission while the legality of the recordings remains an open issue.

Raj Rajaratnam, the principal in the $21 million Galleon Group hedge-fund insider trading case, leaves Manhattan Federal Court for a bail hearing on conspiracy and securities fraud charges in New York, January 12, 2010. REUTERS/Shannon Stapleton

The U.S. Second Circuit Court of Appeals in New York issued an emergency order on February 11 relieving Rajaratnam and co-defendant Danielle Chiesi from having to immediately turn over the evidence, as U.S. District Judge Jed Rakoff had ordered.

Rajaratnam’s lawyers are seeking to suppress what they say are 18,000 recordings. In oral argument on Tuesday, a three-judge panel of the Second Circuit questioned whether it had jurisdiction to intervene at this stage.

“Everybody’s energies should be devoted to getting a quick resolution on the legality of the wiretaps,” Judge Reena Raggi said, as she questioned SEC lawyer Thomas Karr.

Rajaratnam and Chiesi, a former employee of New Castle Funds LLC, were indicted in December on securities fraud and conspiracy charges in what prosecutors have described as the largest U.S. hedge fund insider-trading case.

Investigators said the two made as much as $49 million of illicit gains after using tips from insiders to trade.

At least 21 individuals have been hit with criminal or civil charges, or both, in the probe. Ten have pleaded guilty, and eight, including some former Rajaratnam associates and Galleon employees, are cooperating with the government.

Many of the alleged illicit trades involved technology stocks such as Advanced Micro Devices Inc and International Business Machines Corp.

Criminal investigators used thousands of wiretaps between 2003 and 2009 in the probe.

While prosecutors have long used wiretaps in drug and organized crime cases, Galleon is the first case involving such use to thwart insider trading.

Rajaratnam’s lawyers have said their use in the SEC case ignores “the plain text” of the wiretap statute and privacy concerns.

Patricia Millett, a partner at Akin Gump Strauss Hauer & Feld LLP representing Rajaratnam, said at Tuesday’s hearing that it is a matter of the “government’s uninvited ear coming into conversations ... and hearing everything, everything.”

Millett also maintained that “tons and tons of these tapes have no relevance.”

Raggi said the appellate panel will rule as quickly as it can. The SEC civil fraud trial is scheduled to begin on August 2. The criminal trial is scheduled to begin on October 25. Rajaratnam and Chiesi are seeking separate trials.

The appellate case is SEC v. Galleon Management et al, U.S. Court of Appeals for the Second Circuit, No. 10-0462. The lower court case is SEC v Galleon Management et al, U.S. District Court, Southern District of New York, No. 09-08811.

Reporting by Jonathan Stempel, editing by Dave Zimmerman