Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, March 28, 2012

Judge Rakoff Rejects Gupta's Motion to Exclude Wiretaps From Insider Trading Prosecution

In U.S. v. Gupta, the government's insider trading case against former P&G director (and friend of Raj Rajaratnam) Rajat Gupta, Judge Jed Rakoff made a number of rulings on March 27.  The most significant is that he denied the defendant's motion to suppress wiretaps and the evidence derived from them at his criminal trial.  Judge Rakoff noted that Rajaratnam had made a similar motion in his criminal trial which Judge Holwell had denied.  While Judge Holwell's opinion has no preclusive effect on Gupta, nevertheless, Judge Rakoff found it persuasive, particularly since it was the same wiretaps at issue and Gupta made the same arguments as Rajaratnam.  First, Gupta argued that insider trading is not an offense as to which wiretapping is authorized under the statute.  But the wiretap also had the "bona fide" purpose of investigating wire fraud, an offense for which the statute does permit wiretapping, and so long as the government acted in good faith with respect to the crimes it is investigating and learning of in connection with the wiretap, the government is free to use the evidence obtained in an authorized wiretap in the prosecution of other crimes.  Second, Gupta argued that Judge Holwell failed to appreciate the seriousness of the government's failure to inform the judge who issued the initial wiretap of the parallel SEC investigation.  Like Judge Holwell, Judge Rakoff found the error harmless:  "the simple truth is that ... insider trading cannot often be detected, let alone successfully prosecuted, without the aid of wiretaps."

Judge Rakoff also ruled that the SEC had to turn over its notes on interviews with witnesses testimony to the DOJ, for their review and transmittal of any exculpatory material to the defense.  The judge rejected DOJ's argument that the SEC and DOJ investigations were separate and thus the SEC's notes were not covered by the DOJ's Brady obligations.

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