Posts Tagged ‘galleon group’

Feds Could Lose Galleon Case

Saturday, October 24th, 2009

sunken galleon

Colleagues joke that we ought to be peeved that neither Raj Rajaratnam nor any of his codefendants even called us. After all, we’re one of the few white-collar defense attorneys who also know how to defend wiretap cases. But because we’re not on the case, we’re now free to comment on it. (And we have been doing so, getting quoted this week by Forbes and Bloomberg, among others.)

And we think the feds could easily lose this case, if the defense attorneys do their job well.

You’d think that this would be a slam dunk. First of all, it was a case investigated by the fine folks at the SDNY, who are without exception bright, hard-working and of sound judgment. They tend to make sure they’ve built a rock-crusher case before they bother filing charges and issuing press releases. Unlike some other prosecutor’s offices we could name, the Southern District is definitely not amateur hour. When one defends a case they’ve built, one where they’ve ensured that all the potential holes are plugged, the bulk of the defense attorney’s role is simply fighting for a better plea offer.

Secondly, this was a freaking wiretap case. The defendants are on tape, we are told, using their own phones, committing the crimes in their own voices. How much more of a slam dunk could this be?

Well, from where we sit, it’s anything but a slam dunk. In fact, from the defense point of view, we actually think this case is winnable.

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What are we talking about? Two things.

First, this may be the biggest insider trading case in history, but so far as insider trading cases go, this one ain’t the strongest.

Second, this may be the first time a securities fraud was investigated using wiretaps (and now that Spades have been broken, you can bet your sweet bippy that wires are going to start happening a lot more in these kinds of cases), but there are ways that a good defense attorney can fight that kind of evidence and win. Believe it or not, but it’s the truth.

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First, let’s talk about the alleged insider trading.

Insider trading is a relatively new crime, only added to 18 U.S.C. during the new millennium. (We’re not so sure it should be a crime in the first place — it prevents those with relevant market information from acting on that information; it is an artificial yoke on market forces that affect not only share prices but also the flow of such information, causing inefficiencies and black markets in info; it prohibits those who worked to create a gain in share prices from realizing their fullest profits from their work; it prohibits the best and truest information from being a basis for share price; it encourages and protects the holding back of information that by rights should have been public in the first place. If we had our way, not only would insider trading not be a crime, it would be a requirement. But apart from Adam Smith and the Japanese, we’re not sure too many folks agree with us on this one.)

The crime of Insider Trading is committed when, first, there is some secret, non-public information. Next, there has to be someone (like an executive or director) who has a fiduciary duty not to disclose that information, a duty owed to the owner of the information (like the shareholders). Next, the secret info has to be shared in violation of that fiduciary duty. Finally, the person who uses that information had to know that it had been shared in violation of that fiduciary duty.

That’s a lot of steps. That’s a lot of room for reasonable doubt.

Look at this Galleon case. You’ve got some insiders, who allegedly spilled the beans to an informant, who then passed on that information to the Galleon crew. How the heck does one prove — prove — that Rajaratnam knew in his own mind that this second-hand information he got came from a breach of a third party’s fiduciary duty? He didn’t deal with the insiders, he dealt with someone else who had spoken with the insiders. Even if the informant said point blank that this was inside info, that doesn’t mean Rajaratnam knew it to be so. It’s like a big game of “telephone.” It’s hearsay by the time the info gets to him.

And once the secret info has been shared, is it even secret any more? The cat’s out of the bag. Maybe the insiders and the informant should be charged, but when the informant passed that no-longer-secret info on to Galleon, how is that insider trading any more? (Oh, and what hay we could make with the fact that the insiders themselves don’t seem to have been charged in the first place. That is verrrrrry suspicious.)

From what we’ve seen in the papers released by the DOJ, the evidence does not necessarily show actual subjective knowledge on the part of Rajaratnam that the information had really been shared in violation of a specific fiduciary duty owed by particular people to particular others. “Knowledge” is not the same as “probably” or “it must be so.” That’s the mental state of “recklessness,” not “knowledge.” The feds cannot prove this case by a kind of res ipsa loquitur argument.

The case just isn’t that straightforward on the merits. In addition to the arguments I just mentioned, and about half a dozen others off the top of my head right now, a good defense attorney is going to raise all kinds of doubt with the convoluted nature of the alleged schemes. How can one prove knowledge about the original state of the fiduciary breach when the information is supposed to have followed such a tortuous path, even going backwards in one instance, before being acted on?

And what was Rajaratnam’s job? What was the hedge fund’s job? Their job was to gather information. Every stock trader’s job is to gather information. You keep your ear to the ground, listen to the rumors, find out what the scuttlebutt is. And it seems like everyone and their mother has a tip. A rumor. A sure thing.

None of that is insider trading. That’s just Wall Street. The trick to being a successful trader is figuring out which “sure thing” is likely to be right. The decision may be based on a lot of number crunching, or on a gut instinct, but it’s always a judgment call. The successful trader’s judgment calls are just a little better than others’ are, that’s all. And Galleon was one of the successful ones.

The press has raised eyebrows at Rajaratnam’s “relentless pursuit of data,” as the WSJ puts it. Well, duh, that’s his freaking job. If he wasn’t relentlessly pursuing data, he wouldn’t be in the business. If the prosecution tries to make that look incriminating, like he was seeking or desperate for illegal info, a good defense attorney will defuse it with a simple dose of reality.

And the prosecution needs to convince all 12; the defense only needs one to be unsure. The defense would like to convince all 12, but they don’t need to. There is plenty of room for argument on the merits alone.

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And while we’re talking about the merits of the case, this may be an opportunity for defense counsel to go to the prosecutors and convince them not to seek an indictment. It’s tough, when the prosecutors have made statements to the press and put their own integrity on the line. But a prosecutor of real integrity will always put that aside and do the right thing.

The trick is getting them to see that their present position is wrong. Stupid defense attorneys just whine and beg and plead, but that only works on stupid prosecutors. A halfway-decent prosecutor has made up his mind based on the evidence he’s got. That may only be a thin sliver of reality, and it may well be completely out of the proper context, but it is what he understands reality to be.

The only way you’re going to change a prosecutor’s mind is by either giving them new information that they didn’t already have, or by giving them a new way of looking at the evidence before them.

That is advocacy. And in a case like this, it may behoove defense counsel to advocate fiercely for a rethinking of the charges. Strategically, it may not be the best choice, because of all the press this case has garnered, meaning that the prosecution might just as well be presumed to be inflexible. But we did precisely this in the Bear Stearns subprime hedge fund case, and the manager we represented did not get prosecuted. And that case had just as much, if not more, publicity at the time. It’s an option, here, at the very least.

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But what about the wiretaps? How do you get around that? Isn’t that pretty much the defendants convicting themselves out of their own mouths?

No way.

Wiretap evidence is anything but a sure thing. We know. We did wires for years in the Rackets Bureau of the Manhattan DA’s office, and now we defend them. We’ve taught a nationwide CLE on how to successfully defend them for West LegalEdCenter. Wiretaps are not a sure thing.

They can be defeated with technicalities. Eavesdropping is probably the greatest invasion of privacy that the government can inflict, and so we make law enforcement jump through all kinds of hoops before they are allowed to get an eavesdropping warrant. There are so many i’s to dot and t’s to cross, that the feds hardly use wiretaps in the first place. You’d think otherwise, but it’s so. Plus, they have to go through so many steps in the chain of command to get permission to apply for a warrant, that by the time they could have done so the need or probable cause has evaporated. State prosecutors do way more wires than the feds do.

Because the feds rarely do them, they’re not necessarily as on the ball as certain state-level offices might be. And except for those few high-caliber state offices, the locals can be even more error prone.

That’s big, because little errors in wiretaps have big consequences. Usually, they mean the government loses the case. A little oversight leads to the suppression of all the evidence derived from that point forward in the case, and a multimillion-dollar investigation just went down the toilet. No bullshit.

What kinds of technicalities are there? Tons. Some are just stupid. One particularly stupid requirement is the “sealing” requirement. The idea is that we don’t want to risk having the tapes or CD-ROMs of the intercepted conversations tampered with. We don’t want Nixonesque 17-minute gaps in the evidence. We want the assurance that the evidence never had a chance to be fucked with, and is as pristine now as when it first came in. And so the law requires that the tapes or CDs be sealed immediately, which usually means having them wrapped in evidence tape and having a judge sign and date the tape with a Sharpie.

But “immediately” doesn’t mean “immediately.” Instead of sealing the tapes right after they were recorded, the law says they have to be signed within 24 hours after the expiration of the warrant. Warrants are typically good for 30 days. So the whole month’s worth of tapes or CDs have to be assembled and sealed no later than 24 hours to the minute after the expiration of the wire. And that can be a tough deadline to meet. Especially when, say, it’s 5:04 on a Friday afternoon and all the judges are on their way out of town for the weekend. Or when, out of the hundred or so tapes for that month, one of them by accident didn’t make it into the group to be sealed, which can easily happen. Or when the judge took forever reading that 160-page renewal application, and the deadline passed when he’d only signed half the tapes.

This 24-hour rule is not a “good faith” or “close enough” rule. 24 hours and one minute means the evidence on those tapes cannot be used, and any evidence that resulted from what was heard on those tapes must be suppressed. The case is over. It’s technicalities like these that make prosecutors sweat and cross their fingers and hope the defense attorney won’t be paying attention.

Another technicality, believe it or not, is who signed the warrant application in the first place. The law is very particular about who is allowed to sign the application. Only certain enumerated DOJ officials, or the elected head of the DA’s office, are allowed to do it. We once had to work pretty hard when a very good defense attorney named Marty Adelman noticed that we’d had a substitute sign on behalf of Mr. Morgenthau when the boss was out of town. We had to prove that he really was legitimately unavailable, not merely at a function or indisposed, and that the substitute was the legitimate second-in-line. We’d done it right, of course, but others don’t. At one point, about a gazillion wiretaps had to be thrown out because the U.S. Attorneys in D.C. were having them signed by someone not on the authorized list.

The big thing, of course, when trying to controvert an eavesdropping warrant, is not the technicalities but the probable cause.

There has to have been probable cause to believe that a particular crime, listed in the wiretap statute, was being committed. That evidence of that crime would be found by listening in on a particular phone. That a particular named person would be using that phone, whose conversations would be evidence of the crime. And traditional investigative methods like surveillance, undercovers, informants, subpoenas, etc. wouldn’t get the job done.

That’s a lot to prove. The warrant applications have a heavy burden to meet. A good defense attorney is going to look for chinks in the armor, weaknesses in the alleged probable cause, and is going to fight hard to get the warrants and all their fruits thrown out.

And doing that work, and making the prosecution work hard to defend itself, and letting them know that they’re going to be working this hard for the rest of the case, can convince them to rethink their plea position at the very least.

When looking at probable cause, a decent attorney is going to notice whether the warrant application sections laying out the arguments are just boilerplate, cut-and-pasted from earlier applications, or whether they actually are tailored to the investigation as it then stood. Boilerplate, if it doesn’t really apply here, is a fraud on the court! That warrant and everything thereafter just got thrown out.

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Well, what if the defense litigated the eavesdropping, but it’s all still coming in? They’ve got a trial on their hands. What do they do now? They can’t fight the tapes in front of a jury can they? How can you possibly cross-examine taped evidence?

It ain’t easy, but a smart lawyer can do it.

First of all, you have to realize how wires get started. They don’t come out of the blue. Probable cause does not land in some cop’s lap.

There’s an easy way, and a hard way, to start a wire. The hard way is to have all this suspicion, based on historical intel about your players, surveillance of their movements, and scuttlebutt from the community. Then you track down their phone numbers, and subpoena tons of call records to see who they’re calling and when. Then you look for patterns, and see what you can dig up about the people they call. And you try to put together a res ipsa argument that this criminal activity must be going on over that phone. That ain’t the easy way.

The easy way, like with any investigation, is to flip an informant. Someone screws up, and now needs to work off a likely sentence. The only way they can do that is by getting someone else in trouble. So they agree to wear a body wire, or introduce an undercover, or (usually) consent to the recording of their own phone calls with the target.

Bang. Right there, we’ve got all kinds of arguments for reasonable doubt. Arguments to piss the jury off at the government and want to acquit our client.

Because what is the informant trying to do? He’s trying to get our client in trouble. He’s trying to elicit an incriminating statement over the phone that’s going to let the government tap that number. That doesn’t just happen.

No, that call is going to be scripted. Or rehearsed. Or both. That call is going to have a purpose, and Mr. Informant is going to do whatever he can do to manipulate that conversation so he gets the incriminating words he wants. Or at least words that sound incriminating.

You see where this is going, don’t you? You may never use the word “entrapment” itself, but by golly you’re going to plant that concept in the jury’s mind. That informant was out to save his own skin. That informant did not tell our client the truth. That informant lied about what that conversation was about. Those lies were scripted and rehearsed with the agents beforehand. This whole case is built on lies. And the conversation didn’t go according to plan. Our client was not about to incriminate himself. So that informant manipulated him, changed the subject, hounded him, cajoled him to say things he otherwise never would have said. Throw some in-check indignation, and you can have one pissed-off jury.

And you fight the recordings themselves. “But look at the transcripts, they’re cut and dried,” you say? Poppycock. Those transcripts are nothing but interpretation. Any defense lawyer who sits back and relies on the government’s own interpretation of what is on those tapes needs to find another line of work.

Because everything on those recordings is open to interpretation. Nobody in the real world speaks in clear prose, with footnotes explaining their jargon and inside references. Nobody talks like that.

People throw ideas around. They talk things through. They change their mind. Taken out of context, a statement on Day 1 can sound really incriminating. But in context with a statement on Day 2, it’s perfectly innocent.

People talk in code. Not just spies and crooks, but everyday folks. Nobody spells it all out, that would infuriate the listener. Stuff that the other person also knows goes unsaid. People use jargon that outsiders can easily misinterpret. Phrases like “you’re going to put me in jail” could really be a schtick between friends for “my boss isn’t going to like this,” rather than the literal meaning. But taken out of context, perfectly innocent words can sound damning. Any one of us could face prosecution if our own conversations were selectively lifted out of context.

So it is critical that the defense listen to all of the intercepts, not just those highlighted as the prosecution’s greatest hits. The defense needs to get the whole context, and be able to explain ostensibly incriminating conversations as being perfectly innocent. The client should help as much as possible.

Other room for interpretation is what the freaking words were in the first place. We had plenty of occasions where we listened to a tape and heard one phrase, our detectives heard at least two different phrases, and our trusted paralegals heard it yet another way. Nobody enunciates every consonant. Speech is casual. It’s rushed. It’s muddled. It’s amazing that our brains can separate out as much as we do. But in doing so, we often see patterns where they don’t exist, and hear words and meanings that were never said. It’s like optical illusions for the ear, and they happen all the time. Have an inaudibility hearing if you have to, and get the statement tossed altogether if need be.

So any fool who relies on the government’s transcripts deserves to be called a fool. Make your own dang transcript, and make sure you can sell it to the jury. You want to be the voice they trust.

There are tons of other ways to tear the intercepts apart. These are just a starter. But this post is already getting far too long and we’re getting sleepy.

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The point is that the Galleon case is built on wiretaps, and the “greatest hits” released by the DOJ in its press releases seem eminently attackable. The rest of their recordings are probably even more open to attack. And the merits look pretty darned shaky to begin with. They have to prove actual knowledge, that doesn’t seem to be all that obvious. The ties to the people with the actual fiduciary duty are second-hand at best, and the tie is a lousy rat out to save their own skin. And the insiders are suspiciously not even being prosecuted themselves?

Based on the little that has been released, this case seems to be a prime candidate for reasonable doubt. It just doesn’t look like a slam dunk. The defense has a pretty good shot at winning.

We’ll keep watching, and wish the best of luck