About 2,400 conversations Wharton alumnus Raj Rajaratnam — founder of hedge fund management firm Galleon Group — had with others were secretly recorded, according to a Nov. 25 Bloomberg Businessweek article.
And last Wednesday, a judge in the criminal trial of Rajaratnam, who received his MBA from the Wharton School in 1983, ruled that the evidence could be used in the case against him. This will be the first use of wire-tapping evidence in an insider-trading case, according to Businessweek.
On Oct. 16, 2009, the Federal Bureau of Investigation arrested Rajaratnam for allegedly receiving and profiting from insider trading tips. Rajaratnam faces a criminal trial against him as well as a civil trial against Galleon Group.
The office of Preet Bharara, U.S. Attorney for the Southern District of New York, has described the case as the “largest hedge fund insider trading case in history.”
U.S. District Judge Richard J. Holwell wrote in a court order that, though Rajaratnam “has shown that the government’s application omitted and misstated important information” regarding a key government witness, suppression of the wiretapped evidence is not required because “the remainder of the affidavit demonstrated ample reason to find probable cause.”
The Securities and Exchange Commission has charged 22 individuals in connection with the civil case, including former Intel Capital Director of Strategic Investments Rajiv Goel and former McKinsey and Co. director Anil Kumar, also 1983 Wharton alumni.
Earlier this year, Goel and Kumar pleaded guilty to engaging in insider trading schemes with Rajaratnam, according to court documents.
Law School professor David Abrams explained that insider trading involves the trading of stock using nonpublic information. However, he also said there is some debate over its illegality.
“If the market is supposed to respond to new information, insider trading certainly brings about such a response,” Abrams said. “Some people would say that it makes the market more accurate.”
Abrams said a counter-argument — aside from the “intuitive and moral” view that insider trading is just wrong — would be that it discourages people from trading in the stock market, as noninsiders would be disadvantaged.
Though there is currently debate over the use of wiretapping in a national security context, where the government “has taken the position that they don’t need a warrant or a judge,” Law school professor David Rudovsky said, “I’m not sure in normal criminal investigations that they’ve been very controversial at all.”
“The law is pretty settled that if it’s a traditional criminal investigation, they can do it as long as it’s subject to judicial approval,” he said. “There’s probable cause and steps are taken to minimize irrelevant conversations.”
Rudovsky described a probable cause as being “very case-specific,” and that prosecutors probably had to show a judge “a fair basis to believe that if they overhear someone’s conversations they’ll discover evidence of criminality … either through informants or searches or other sources.”
“They can’t just say, ‘maybe he is doing crime, so let’s do it,’” Rudovsky said.
Both prosecuting attorney Jonathan Streeter and defendding attorney John Dowd declined to comment on the case.
Note: This article was updated to clarify that Rajaratnam is an MBA graduate.
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