Pretextual Wiretapping: Raj Rajaratnam and Perfect Hedge

            What do Raj Rajaratnam and a mafioso have in common? While that might be a loaded question, to direct the discussion, both have received similar treatment from the Federal Bureau of Investigation (FBI). Rajaratnam’s recent conviction for securities fraud by way of insider trading came about through the use of evidence obtained by wiretapping. Wiretapping is a common technique used by the FBI to help build cases against members of organized crime under the Racketeer Influenced and Organized Crime Act (RICO). Referred to by the FBI as operation “Perfect Hedge,” the United States has begun to use wiretapping to prosecute insider trading. Just last year, a federal judge upheld the use of wiretapping against Rajaratnam. Even though insider trading is not a crime that can support a wiretapping application, Rajaratnam’s motion to suppress the evidence obtained from his wiretap was denied. The case of Raj Rajaratnam, which is currently on appeal in the Second Circuit, presents a tough dilemma. In today’s “Occupy Wall Street” world, society has greater demands for fair dealing and justice in the financial services industry. At the same time, those working in business and finance are entitled to the same United States Constitutional protections as any other American. Perfect Hedge might have noble intentions, but how far should we go in investigating and prosecuting alleged white collar criminals?

            “Perfect Hedge” was the brainchild of the New York branch of the FBI. Agents David Chaves and Patrick Carroll, heads of the securities and commodities fraud units, had received intelligence that surging profits in hedge funds were likely the result of endemic insider trading. The agents had learned that the hedge fund industry was becoming “similar to organized crime: insular and distrusting of the outside.” Therefore “Perfect Hedge” was designed to treat insider trading like organized crime and deploy techniques like wiretapping to uncover the evidence needed to prosecute.

            Wiretapping refers to the “interception and capture” of wire, oral or electronic communication. Title III of the Omnibus Crime Control and Safe Streets Act (the Federal Wiretap Act) authorizes and governs wiretaps. Unquestionably, wiretapping is a great invasion of privacy. The wiretapped suspect has no way of knowing his or her communication is being monitored. Consequently, wiretapping is held to rigorous standards. Only the highest-ranked, specially authorized prosecutors can pursue an application for a wiretap. Wiretapping can only be used when other forms of investigation have proven to be ineffective or unsafe.

            Further, wiretapping is limited only to crimes enumerated in Title III. Securities fraud and insider trading are not listed in Title III. Consequently, Rajaratnam moved to suppress the evidence of insider trading obtained from his wiretap. His motion was denied however because evidence of wire fraud and money laundering were the grounds under which the United States applied to wiretap. The United States District Court for the Southern District of New York held that incidental evidence obtained in a wiretap is admissible. Therefore, even though the FBI wiretapped Rajaratnam knowing they would obtain evidence of a crime not covered in Title III, the evidence was admissible.

            “Perfect Hedge” is a troubling program. The American financial sector is under heavy scrutiny in today’s world. With frustrations rising during the Recession, more and more Americans are calling for accountability from Wall Street. However, at what cost must accountability come? The decision on Rajaratnam’s wiretap is concerning. Wiretapping is held to a higher standard than the typical investigatory search because of the extra requirements levied by Title III. The FBI tried to side-step Title III by applying for the wiretap under eligible crimes.  This practice creates a case of what can best be described as pretextual wiretapping. The idea of a pretextual wiretap is disheartening. While insider trading is a detrimental and corrupt act, its status does not lessen the burden that pretextual wiretapping impinges upon American privacy.

            Rajaratnam’s initial wiretap decision currently awaits appeal in the Second Circuit Court of Appeals. Therefore, the pretextual wiretapping employed in “Project Hedge” may be overturned. However, regardless of whether the District Court is or is not overturned, transparency in business is an important societal interest. Regardless of the fate of “Perfect Hedge”, Congress should strongly consider adding securities fraud and insider trading to Title III. Doing so would allow for insider trading to be legitimately wiretapped under the requirements of Title III. Accountability in business is commendable but highly invasive obstructions of American privacy under pretext are not.