Secret, court-approved wiretaps put in place more than two years ago are now being used by prosecutors in a widening inquiry of securities fraud and insider trading involving hedge funds and consultants that provide industry research, according to court documents and interviews with people close to the investigations.
The wiretaps were originally part of an insider trading investigation of the New York hedge fund Galleon Group. Those wiretaps, which involved the phones of at least seven individuals, potentially provided prosecutors with a vast array of new evidence for use in the latest investigations. Only four of the seven wiretap targets have been identified in court papers that have been made public so far in the Galleon case.
The expanded use of the secret wiretaps in the new inquiries was revealed last week by the United States attorney in Manhattan when the Federal Bureau of Investigation arrested Don Ching Trang Chu, a consultant at Primary Global Research, on securities fraud and conspiracy charges.
Expert networking firms, like Primary Global, which seek to link corporate executives or industry insiders with investment managers, have grown rapidly in recent years as securities regulators have cracked down on the ways that company managers can tell Wall Street stock analysts about corporate developments.
The case involving Mr. Chu relied on information gathered in one of the seven wiretaps set up in the Galleon investigation, according to court documents. The Galleon case, which began after insider trading charges were filed against its founder, Raj Rajaratnam, in October 2009, was the first insider trading case to rely on wiretaps. It has so far resulted in criminal charges against 23 people and more than a dozen guilty pleas.
A federal judge allowed the use of the wiretapped conversations in the Galleon prosecutions last week. As a result, the secret wiretaps are likely to be used to bring more cases related to the expert-network firms, say people close to the investigation, who spoke on the condition of anonymity because the investigation was still unfolding. The trove of wiretap recordings include conversations involving at least 550 people.
Those wiretaps are in addition to recordings made by several targets of the Galleon insider trading investigations who agreed to cooperate with law enforcement by wearing recording devices after prosecutors confronted them with allegations of their participation in the insider trading schemes.
In the new investigation, three hedge funds were raided by the F.B.I. last week and several other money management companies received subpoenas or requests for information. Preet Bharara, the United States attorney for the Southern District of New York, said last week that the investigation was continuing.
The existence of at least seven secret wiretaps was disclosed in little-noticed documents filed in Federal District Court in Manhattan in May. The documents included a letter, dated March 22, from Mr. Bharara to lawyers representing Mr. Rajaratnam and Danielle Chiesi, a co-defendant who was employed by a hedge fund called New Castle Partners.
In the letter, Mr. Bharara noted that the evidence prosecutors had turned over to the defendants included, in addition to the wiretaps of the defendants’ own phones, wiretap applications for phones used by five other individuals.
One of those five individuals is Richard Choo-Beng Lee, a hedge fund trader who has pleaded guilty to insider-related charges in the Galleon case. Mr. Lee, whose guilty plea included an agreement to cooperate with the government, was named last week as a cooperating witness in the new expert-network case involving Mr. Chu.
Another of the individuals is known to be Ali Far, of Saratoga, Calif., a co-founder and managing partner at Far & Lee, a trading firm, and Spherix Capital, a hedge fund. Mr. Far also pleaded guilty in October 2009 to insider-related charges and is cooperating with prosecutors.
The identities of the three other individuals whose phones were tapped have not yet been disclosed, according to Ellen Davis, a spokeswoman for the United States attorney in New York.
The Securities and Exchange Commission has been hoping to use the results of the wiretaps in its companion civil cases against the Galleon defendants and in the new expert-network investigations, but so far it has not yet been able to gain access to the information. The S.E.C. is seeking a court judgment that would allow it to use the information gleaned from the wiretaps.
It was only after the S.E.C.’s investigation of Galleon hit a dead end in March 2008, according to court documents in the Galleon case, that the United States attorney sought to use court-approved wiretaps, an investigative technique that has long been used in racketeering and other criminal investigations but had not previously been invoked in insider trading.