The enormous Galleon insider trading case, seen by many as a muscle-flexing excercise by the SEC after the failings exposed by the Bernie Madoff scandal, has created some very interesting issues with wiretapping as civil and criminal cases have overlapped both temporally and substantively. Traders at Galleon have been accused of reaping over $20 million in illegal insider-trading profits, leading to both a Justice Department criminal case and an SEC civil case. As part of its investigation, the Justice Department tapped the defendants to gain evidence of possible illegal behavior, then shared this evidence with the defense teams once the investigation was in process. The SEC now hopes to acquire these tapes as part of pretrial discovery, a move which may be critical if it hopes to put together a winning case.
In the wake of the Madoff scandal, and as stories began to surface suggesting that the SEC had been alerted about the Ponzi scheme going back to the beginning of the decade, the agency was keen to get its hands on a winning case. In Galleon, it believes that it has found one. However, as noted, a succesful claim may rest on evidence which it does not currently have. What is interesting about its request for the tapes is that it presents a novel legal question; namely, in the absence of statutory clarity, can wiretap evidence gained during a criminal investigation and which has not been admitted during trial be discovered and utilized in the context of a civil trial.
This is essentially a question of privacy rights of defendants vs. the ability of the government to use all of the tools at its disposal to prevent and/or punish wrongful behavior. And the ruling could have far reaching implications, with among the most extreme being an increase in the use of surveillance by the government in white collar criminal cases. This is not a tool that has been utilized in the past, however it is one which regulatory agencies would obviously love to have access to. Although it may seem sensible to fight crime using all the most state-of-the-art tools, there are also costs involved and constitutional rights to consider. As counsel for Raj Rajaratnam, the founder of Galleon, said in a statement, "Mr. Rajaratnam's constitutional right to defend himself in (the criminal) case does not create an independent discovery right by the SEC."
Diligent layman viewers of Law & Order, dazzled by in-court performances, sometimes miss the idea that it is often what happens before a trial starts that makes the most impact on its final result. The upcoming wiretapping ruling is a great example, as the SEC might not have a case without the benefit of this critical piece of evidence. Likewise, fans of Sam Waterston and friends probably don't realize that rulings in trials often impact the future far more than they do the case then at bar. Galleon also provides a great example of this assertion, as a ruling for the SEC could impact the entire strategy of securities regulators in identifying and punishing insider traders going forward. It is difficult to say what the right decision is, as balancing the arguments of both sides seems to leave the scales of justice roughly even. However, what is not difficult is envisioning the far-reaching impact that the ruling could have either way it comes out.