Raj Rajaratnam’s lead lawyer, John Dowd, is apparently not a big fan of CNBC.
Yesterday Dowd literally gave us the middle finger and told us to “get the frak out of here.” Only he didn’t use the Battlestar Galactica version of the F word.
But let’s not allow Dowd’s rudeness to get in the way of assessing the strength of Rajaratnam’s likely argument to overturn his conviction.
After all, Dowd was having a tough day. He had just lost the case that he had announced would be his last trial ever. That’s gotta sting.
We know Rajaratnam will appeal his conviction. One of Dowd’s other comments yesterday made this a certainty.
“We’ll see you in the second circuit,” he said, referring to the federal appeals court that reviews the decisions of the trial court that convicted Rajaratnam.
So what’s Rajaratnam going to appeal?
Let’s start with what he will not appeal. He will probably not argue with the factual findings of the court because federal appeals courts do not review findings of facts at the trial level. The jury's conclusion that Rajaratnam traded on information that was material, non-public and leaked in breach of various confidentiality rules will stand.
But what might not hold up to scrutiny is the judge’s decision to allow the prosecutors to use wiretaps to prove its case.
Federal laws allowing wiretaps are quite specific. They do not allow wiretaps to be used to collect evidence for any of the charges on which Rajaratnam was convicted. Federal law enforcement officials cannot legally get permission from courts to tap phones to investigate securities fraud.
The use of wiretaps to catch insider trading, in fact, is legally revolutionary. Throughout history, wiretaps have been reserved for only the most serious criminal activity. Think espionage, terrorism, drug trafficking, and—especially—organized crime.
What prosecutors did in the case against Rajaratnam was creatively use a part of the lawintended to fight the Mafia. The wiretapping rules allow investigators to tap phones in pursuit of “wire fraud,” which is the technical legal term for the use of electronic forms of communication across state lines for the purpose of committing a federal crime.
The reason wire fraud is included in the wiretapping rules is that wire fraud is one of the underlying crimes that can be used to get a conviction of racketeering—a law explicitly designed to punish mobsters.
What prosecutors did was tell a court that they were investigating wire fraud as part of their insider trading probe. Once the wire taps are properly in place, they are then allowed to bring charges for any criminal activity they discover—whether or not it is related to the original justification for the taps.
Think of it like this: If you get pulled over for driving a trunk full of cocaine up from Florida to New York and get pulled over for having a broken tail light, the police are allowed to ask if they can search your car. If you give them permission and they find the drugs, they can arrest you for possession—even though that’s not why they originally pulled you over.
What Raj’s lawyers will argue is that this was a bait and switch on the courts. They will say that the wiretaps were never really for wire fraud—this was just an excuse to catch people engaged in securities fraud.
To return to my analogy, they’ll argue that the tail light on the car was not broken at all. The cops just pulled the car over and conducted an illegal search. And if the search was illegal, the evidence discovered needs to be excluded from the trial.
Judge Richard Howell of the Southern District of New York allowed the evidence from the wiretaps to be used on the grounds that wire fraud and securities fraud can be very closely related. It will be up to the appeals court to decide whether or not this expansionary view of how wire taps can be used complies with the laws.
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