On October 16, 2009, the United States Attorney's Office for the Southern District of New York (USAO) unsealed criminal complaints charging several defendants, including Appellants Raj Rajaratnam and Danielle Chiesi, with securities fraud and conspiracy. That same day, the Securities and Exchange Commission (SEC) filed a civil complaint at http://www.sec.gov/litigation/complaints/2009/comp21255.pdf against Appellants and others, charging them with insider trading and conspiracy based on the same conduct at issue in the criminal case. Two months later, Appellants were indicted for insider trading and conspiracy. See, http://www.justice.gov/usao/nys/pressreleases/December09/rajaratnamrajandchiesidanielleindictmentpr.pdf
The Appellants' criminal case was assigned to Judge Richard Holwell. (United States v. Rajaratnam, No. 09 Cr. 1184 (RJH)). Meanwhile, a separate indictment charging similar crimes against other defendants, arising from the same investigation, was assigned to Judge Richard Sullivan. (United States v. Goffer, No. 10 Cr. 56 (RJS)). The SEC civil action was assigned to yet a third judge, Judge Jed Rakoff.
Although the Appellants' civil and criminal cases are proceeding before different judges, both cases revolve around the same allegations: that Appellants engaged in widespread and repeated insider trading at several hedge funds, including Galleon Management, LP, a firm founded by Appellant Rajaratnam, where he remains the managing general partner, and New Castle Funds LLC, where Appellant Chiesi was a 11 hedge fund manager and investment consultant. According to the SEC, the scheme, which allegedly generated over $52 million in illegal profits, involved tips from insiders concerning market moving events such as quarterly earnings announcements, takeovers, and material contracts, that spurred the defendants to trade shares of numerous public companies illegally.
The criminal investigation into these allegations included court-ordered wiretapping of communications between the defendants and others. According to Appellants, the wiretapped conversations, which spanned sixteen months, included 18,150 communications involving 550 separate individuals, which were intercepted from ten separate telephones - including Appellants' home, office and mobile phones.
As part of criminal discovery, the USAO provided to Appellants copies of these wiretapped communications, the orders authorizing the wiretaps, and the government's applications for those orders. The USAO did not, however, share those materials with the SEC. Apparently, the USAO inadvertently provided the SEC with a small group of wiretap recordings that were later retracted. Although initially contending in the district court that it had legal authority to share the materials with the SEC in its discretion, the USAO now takes the position that it lacks such authority.
SEC Wants Wiretaps -- But By a Backdoor?
The SEC instead sought access to the wiretap recordings by demanding them from Appellants in discovery in the civil case before Judge Rakoff. Appellants opposed the demand on the grounds that the materials were not relevant and that disclosure was prohibited by Title III, the statute that authorizes such wiretaps. The SEC then moved to compel disclosure.
Rakoff's Orders Production -- It's Only Fair
After hearing oral argument, the district court ordered Appellants to produce the wiretapped conversations to the SEC and to any other party to the civil action that demanded them. The court noted that while the USAO had not shared the wiretap materials with the SEC, the Appellants possessed these materials, they apparently asserted the right to share them with other defendants pursuant to a joint defense agreement, and no protective order had been issued in the criminal case barring Appellants from using the wiretap materials in the civil case, or from disclosing them to the SEC. Judge Rakoff found that
the notion that only one party to a litigation should have access to some of the most important non-privileged evidence bearing directly on the case runs counter to basic principles of civil discovery in an adversary system and therefore should not readily be inferred, at least not when the party otherwise left in ignorance is a government agency charged with civilly enforcing the very same provisions that are the subject of the parallel criminal cases arising from the same transactions.
Defendant/Appellant Rajaratnam and Chiesi appealed Rakoff's discovery order compelling them to disclose thousands of wiretapped conversations (originally provided to Appellants by the USAO in parallel criminal proceedings) to Plaintiff-Appellee SEC for use in its civil enforcement action against Appellants. Although the Second Circuit Court of Appeals found that the SEC had a legitimate right of access to the materials, it also found that the district court exceeded its discretion. Pointedly, the Second Circuit stated:
While the district court was correct that the SEC had a legitimate right of access to the wiretap materials, it could not properly balance that interest against the privacy interests at stake while the legality of the wiretaps was still unresolved. In any event, the district court exceeded its discretion in ordering disclosure of wiretap materials without regard to relevancy, particularly in a case involving a large number of recordings intercepting conversations of innocent parties. In sum, because the challenged order was thus "clearly outside the range of permissible decisions," we conclude that Appellants have shown a "clear and indisputable right" to the writ of mandamus to vacate that order.
2nd Circuit Vacates
On September 29, 2010, the Second Circuit granted Rajaratnam's writ of mandamus, a remedy reserved for cases where the District Court has made an incorrect determination that cannot be remedied by a later appeal, vacated the district court's discovery order, and remanded the cause to the district court for further proceedings not inconsistent with the opinion.
Previously, Judge Richard J. Holwell, District Judge for the Southern District of New York, granted Rajaratnam's request for an evidentiary hearing pursuant to Franks v. Delaware, 438 U.S. 154 (1978) . A Franks hearing allows a defendant to challenge the government's application for wiretap authorization where the
[D]efendant makes a substantial preliminary showing that a false statement knowingly and intentioanally, or with reckless disregard for the truth, was included by the affiant in the warrant affidavit, and if the allegedly false statement is necessary to the finding of probably cause, the Fourth Amendment requires that a hearing be held at the defendant's request.
Franks, 438 U.S. at 155-56
In granting the Franks hearing, Judge Holwell noted that
Rajaratnam has made a substantial preliminary showing that the government recklessly or knowingly misleadingly omitted several key facts from its March 7 affidavit, including: (1) the existence of a lengthy SEC investigation that preceded the wiretap request, and a prior FBI investigation of Rajaratnam's connection to insider trading; (2) the fact that the SEC generated some four million documents, all of which the goverment apparently had access to prior to its March 7, 2008 wiretap application to Judge Lynch; and (3) the fact that Galleon employees, including Rajaratnam, testified under oath and participated in witness interviews with the SEC, the transcripts of which were apparently available to the government prior to March 7. These omissions, particularly in light of what the affidavit did say, are serious enough to constitute a substantial preliminary showing that the government acted knowingly or recklessly.
Judge Holwell has rescheduled the Franks hearing for October 4, 2010 at 10 a.m.