Decision Allowing Wiretaps in Galleon Group Case

Case 1:09-cr-01184-RJH Document 148 Filed 11/24/10 Page 1 of 68
UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK
UNITED STATES OF AMERICA,
-against- 09 Cr. 1184 (RJH)
MEMORANDUM OPINION
RAJ RAJARATNAM and DANIELLE CHIESI, AND ORDER
Defendants.
Richard J. Holwell, District Judge:
Defendants Raj Rajaratnam (“Rajaratnam”) and Danielle Chiesi (“Chiesi”) have
moved to suppress the Title III material gathered by the government’s wiretaps of their
respective phones. Each makes four separate arguments for suppression in full or part:
(1) the government was not entitled to use wiretaps to investigate insider trading, a crime
not specified in Title III; (2) the government’s application and supporting affidavits failed
to establish probable cause; (3) the government’s application and supporting affidavits
failed to establish the inadequacy of conventional investigative procedures and, therefore,
the “necessity” of using wiretaps; and (4) the government failed to minimize various
conversations.
The Court concludes that defendants’ arguments do not justify suppression and
therefore denies both motions. Because Title III authorizes the government to use
wiretaps to investigate wire fraud, the government was authorized to use wiretaps to
investigate a fraudulent insider trading scheme using interstate wires even though Title III
does not specifically authorize wiretaps to investigate insider trading alone.
1
With regard to probable cause, Chiesi has failed to show that the government’s
wiretap application contained material misstatements or omissions, or was otherwise
deficient in showing probable cause. Rajaratnam has shown that the government’s
application omitted and misstated important information regarding the credibility of a key
government informant, Roomy Kahn, but suppression is not required because the
remainder of the affidavit demonstrated ample reason to find probable cause.
Chiesi has likewise failed to make a preliminary showing that the government’s
wiretap application was deficient in showing that a wiretap was necessary. As for
Rajaratnam, necessity presents a closer question. Earlier this year, the Court found that
Rajaratnam had made a substantial preliminary showing that the government recklessly
failed to disclose that the SEC had been conducting its own insider trading investigation
of Rajaratnam upon which the government’s criminal investigation substantially relied.
A four-day hearing last month confirms in the Court’s judgment that the government
failed to disclose the nature and extent of the SEC investigation even though (1) that
investigation was the most important part of the criminal investigation at the time of the
wiretap application and (2) that investigation employed entirely conventional
investigative techniques. Given that an issuing court relies on the government candidly
to disclose the full nature and scope of its investigation in order to determine whether a
wiretap is necessary, the omissions here are troubling to say the least. But that is not the
end of the matter. The hearing also demonstrated that, while the SEC investigation used
conventional techniques and was the bedrock of the prosecutor’s own criminal
investigation, the SEC investigation had nevertheless failed to fully uncover the scope of
Rajaratnam’s alleged insider trading ring and was reasonably unlikely to do so because
2
evidence suggested that Rajaratnam and others conducted their scheme by telephone.
Accordingly, disclosure of all the details of the SEC’s investigation that the government
recklessly omitted would ultimately have shown that a wiretap was necessary and
appropriate.
Finally, the government complied with its statutory responsibility to minimize
recording calls unrelated to the crimes the government had probable cause to suspect.
BACKGROUND
The United States Attorney’s Office for this district (“USAO”) and the FBI began
the criminal investigation resulting in the indictment of Rajaratnam in 2007.1 The
investigation of Chiesi apparently did not begin until later, sometime in mid-2008. In
connection with these investigations, the government sought and obtained authorization
to wiretap Rajaratnam’s and Chiesi’s phones.
The government first sought authorization to wiretap Rajaratnam’s cell phone in
an application submitted to Judge Lynch on March 7, 2008. (Gov’t Opp’n to Rajaratnam
Ex. 1-A.) Attached to that sworn application was a 53-page affidavit of FBI Special
Agent B. J. Kang (“Kang”). (Gov’t Opp’n to Rajaratnam Ex. 1-C.) Judge Lynch granted
the application for a 30-day wiretap, finding (1) probable cause that Rajaratnam and
others were involved, inter alia, in wire fraud the extent of which would be revealed
through the interception of telephone communications, and (2) that a wiretap was
necessary in that normal investigative techniques were or would be unlikely to succeed in
uncovering the fraud. (Gov’t Opp’n to Rajaratnam Ex. 1-D.) The government began
1
The USAO and the FBI are referred to separately and together as “the government” or,
occasionally, “the prosecutor” or “the criminal authorities.” The Securities and Exchange
Commission is referred to as the SEC throughout.
3
intercepting communications over Rajaratnam’s phone on or about March 10.
Thereafter, the government applied for authorization to continue intercepting
Rajaratnam’s phone for another 30 days. (Gov’t Opp’n to Rajaratnam Exs. 2-A, 2-C.)
On April 8, Judge Cote granted that application. (Gov’t Opp’n to Rajaratnam Ex. 2-D.)
The government applied for reauthorization six more times, between May and November
of 2008, each application based substantially on intercepts over Rajaratnam’s phone, and
each application authorized by a judge in this district. (Gov’t Opp’n to Rajaratnam Exs.
3-D, 4-I, 5-D, 6-D, 7-D, 8-D.)
On August 13, 2008, the government applied for authorization to wiretap three
phones that Chiesi subscribed to and used. (Gov’t Opp’n to Chiesi, Exs.1-A, 1-B, 1-C.)
Judge Sullivan granted the request that day. (Gov’t Opp’n to Chiesi Ex. 1-D.) He
approved a second 30-day application on September 12, 2008. (Gov’t Opp’n to Chiesi
Ex. 2-D.)
On October 16, 2009, Rajaratnam, Chiesi, and others were arrested and charged
with multiple counts of conspiracy and securities fraud. The original indictment was
returned against both defendants on December 15, 2009, and a superseding indictment
was returned on February 9, 2010 (Gov’t Opp’n to Rajaratnam Ex. 12).
Both defendants moved to suppress the evidence that the government obtained
through the wiretaps on their phones. In connection therewith, Rajaratnam requested a
hearing under Franks v. Delaware, 438 U.S. 154 (1978) (a “Franks hearing”). In Franks,
the Supreme Court held that, despite the “presumption of validity with respect to the
affidavit supporting [a] search warrant”, a defendant can challenge an affidavit “where
the defendant makes a substantial preliminary showing that a false statement knowingly
4
and intentionally, or with reckless disregard for the truth, was included by the affiant in
the warrant affidavit, and if the allegedly false statement is necessary to the finding of
probable cause….” Id. at 155-56. 2 The Court denied Rajaratnam’s request for a Franks
hearing regarding probable cause but found that he had “at least established good grounds
for holding a Franks hearing regarding the veracity of the [Kang] affidavit and the issue
vel non of whether the necessity requirement has been satisfied.” United States v.
Rajaratnam, 2010 WL 3219333, at **1-2 (S.D.N.Y. Aug. 12, 2010). The Court reserved
judgment on other aspects of the defendants’ motion to suppress. (July 27, 2010 Hr’g Tr.
at 157.) In his post-hearing submission, Rajaratnam asked the Court to reconsider its
prior holding regarding probable cause. (See Rajaratnam Post Hr’g Br. at 47-49.) 3
DISCUSSION
Rajaratnam’s and Chiesi’s motions raise essentially the same arguments. First,
they argue that Title III does not authorize the use of wiretaps to investigate insider
trading, an offense not specifically mentioned in the statute. They also argue that the
government’s wiretap affidavits in this case failed to establish (i) probable cause to use a
wiretap and (ii) that wiretapping was necessary to the government’s investigation.
Finally, both argue that the government did not properly minimize its interceptions,
2
In Franks v. Delaware, 438 U.S. 154 (1978), the Supreme Court further held that, “[i]n
the event that at that hearing the allegation of perjury or reckless disregard is established
by the defendant by a preponderance of the evidence, and, with the affidavit’s false
material set to one side, the affidavit’s remaining content is insufficient to establish
probable cause, the search warrant must be voided and the fruits of the search excluded to
the same extent as if probable cause was lacking on the face of the affidavit.” Id. at 156.
3
Citations abbreviated “Br.”, “Opp’n”, or “Rep. Br.” refer to the parties’ initial
submissions. Citations to papers’ abbreviated “Post Hr’g Br.”, “Post Hr’g Opp’n” or
“Post Hr’g Reply Br.” refer to the parties’ submissions following the Franks hearing.
5
which they say justifies suppression in part or full. The Court addresses each of these
arguments in turn.
I. Use of Title III to Investigate Insider Trading
When a court authorizes a wiretap, Title III requires that it “specify the offenses
in connection with which the permission was granted . . . .” United States v. Masciarelli,
558 F.2d 1064, 1067 (2d Cir. 1977); see 18 U.S.C. § 2518(1)(b)(i), (3)(b), 4(c). Wiretaps
may only be authorized to investigate offenses specified in Section 2516. See 18 U.S.C.
§ 2516. Still, the statute recognizes that “a law enforcement officer lawfully engaged in a
search for evidence of one crime” may happen upon evidence of another crime not
specified in the court’s authorization order—and perhaps not specified in Section 2516
either. Masciarelli, 558 F.2d at 1067. When that happens, “the public interest militates
against [the officer’s] being required to ignore what is in plain view.” Id. Thus Title III
contains what is in some sense a plain-view exception, which allows the government to
offer evidence of other crimes when that evidence is obtained during the course of an
investigation for an authorized offense. See id.; 18 U.S.C. § 2517(5). Specifically,
Section 2517(5) provides that:
[w]hen an investigative or law enforcement officer, while engaged in intercepting

wire, oral, or electronic communications in the manner authorized herein,
intercepts wire, oral, or electronic communications relating to offenses other than
those specified in the order of authorization or approval, the contents thereof, and
evidence derived therefrom, . . . may be used under subsection (3) of this section
when authorized or approved by a judge of competent jurisdiction where such
judge finds on subsequent application that the contents were otherwise intercepted
in accordance with the provisions of this chapter. Such application shall be made
as soon as practicable.
6
18 U.S.C. § 2517(5).4
Under the terms of Section 2517(5), the government can only use wiretap
evidence of crimes “other than those specified” in the authorization order or in Section
2516 by obtaining judicial approval “as soon as practicable.” The section “does not
specify the exact form an application for subsequent approval should take, nor exactly
what procedures a court should follow in giving or denying its authorization.” United
States v. Gerena, 653 F. Supp. 974, 978 (D. Conn. 1987). Thus courts in this circuit have
looked to Congress’s intent in enacting the provision, and have consistently applied the
following test: the government must show that “the original order was lawfully obtained,
that it was sought in good faith and not as a subterfuge search, and that the
communication was in fact incidentally intercepted during the course of a lawfully
executed order.” United States v. Marion, 535 F.2d 697, 700 (2d Cir. 1976) (quoting S.
Rep. No. 90-1097, at 12 (1968), reprinted in 1968 U.S.C.C.A.N. 2112, 2189). Courts
treat these standards less as independent prongs than as various ways of stating the
government’s obligations. The government must obtain wiretap warrants in good faith—
that is, in connection with an offense for which Title III permits wiretapping—not as a
subterfuge for gathering evidence of other offenses. If the government does so, any other
evidence it happens to intercept will have been intercepted incidentally. See United
States v. Levine, 690 F. Supp. 1165, 1171 (E.D.N.Y. 1988).
In this case, the government’s actions do not reflect subterfuge. The wiretap
applications candidly detailed the nature of the scheme for which wiretaps were sought.
4
Section 2517(3) allows for the disclosure of wiretap evidence “while giving testimony
under oath or affirmation in any proceeding held under the authority of the United States
or of any State or political subdivision thereof.” 18 U.S.C. § 2517(3).
7
They described the evidence of an insider trading conspiracy that involved Rajaratnam
and Chiesi; they stated that the evidence established probable cause of wire fraud and
money laundering; and they noted that the evidence would also establish probable cause
of the defendants’ participation in securities fraud, although that crime was not an
authorized predicate offense under Title III. (See, e.g., Gov’t Opp’n to Rajaratnam Ex. 1-
C at 3 & n.1; Gov’t Opp’n to Chiesi Ex. 1-C at 3 & n. 1.) In other words, the government
made quite clear that it wanted to use wiretaps to investigate an insider trading
conspiracy, and that the investigation would likely uncover evidence of wire fraud and
money laundering (offenses for which Title III specifically permits wiretaps) and
securities fraud (an offense for which it does not). Cf. Levine, 690 F. Supp. at 1170 (“A
factor pertinent to the determination of good faith may be whether the officials concealed
from the judge issuing or extending the original warrant the fact that they foresaw a high
likelihood that evidence of other crimes would be revealed. To hide that fact might give
rise to an inference of bad faith.”).5 With all these facts in hand, several judges in this
district found probable cause that Rajaratnam and Chiesi had committed or would
5
The issuing judges did not know and could not have predicted that the government
would ultimately charge the defendants with only securities fraud, not wire fraud or
money laundering. (Cf. Rajaratnam Br. at 63.) But the government should not be
required to charge the crime for which it obtains wiretap authorization. Although
charging a defendant with the crime for which wiretapping was authorized is some
evidence of the government’s good faith, see United States v. Levine, 690 F. Supp. 1165,
1171 (E.D.N.Y. 1988), the converse is not necessarily true. The government’s charging
decisions depend on a variety of factors. That it decides not to charge a defendant with a
crime for which it previously sought wiretap authorization does not imply it had no
legitimate reason for the wiretap to begin with.
8
commit the crimes of wire fraud and money laundering.6 Accordingly, all authorized the
use of wiretaps in connection with the government’s investigation.
Still, defendants say the government should not be allowed to use wiretap
intercepts as evidence of securities fraud here. They argue that the interception of
communications evidencing securities fraud could not have been incidental, because (1) it
was the government’s primary objective; (2) at a minimum it was anticipated; and (3) to
so hold would undermine Congress’s intent in enacting Title III. Each of these
arguments is unavailing.
Defendants contend that the government’s primary objective in using wiretaps
was to drum up evidence of securities fraud, as shown by the wiretap applications’ focus
on insider trading as opposed to wire fraud. But defendants’ argument unrealistically
assumes a gulf between these two crimes. Securities fraud does contain an additional
element, “fraud in connection with the purchase or sale of any security”; and wire fraud
does require the “use of interstate wires.” United States v. Regensberg, 604 F. Supp. 2d
625, 634 (S.D.N.Y. 2009). But unlikely is the insider trading scheme that uses no
interstate wires. Sometimes the government even charges both kinds of fraud for the
same core conduct, a practice that Congress, in the legislative history of the Insider
Trading and Securities Fraud Enforcement Act of 1988, and the Supreme Court have both
endorsed. See H.R. Rep. 100-910, at 29 (1988), reprinted in 1988 U.S.C.C.A.N. 6043,
6074 (stating that the government can “litigate insider trading cases based on other
provisions of the securities laws and of the general mail and wire fraud statutes”); United
6
These findings are entitled to substantial deference. See United States v. Wagner, 989
F.2d 69, 72 (2d Cir. 1993) (“A reviewing court must accord substantial deference to the
finding of an issuing judicial officer that probable cause exists.”).
9
States v. Carpenter, 484 U.S. 19, 28 (1987) (holding that conspiracy to trade on
confidential information was within “the reach of the mail and wire fraud statutes,
provided the other elements of the offenses are satisfied”). Here the government had
evidence of insider trading with a wire. (See Gov’t Opp’n to Rajaratnam Ex.1-C ¶¶ 7, 10,
11, 18, 19.) Therefore it makes little sense to call securities fraud a primary objective and
wire fraud a “fig leaf” (Rajaratnam Reply Br. at 40).
Of course, there is no denying that, in intercepting communications that would
provide evidence of wire fraud, the government expected to get evidence of securities
fraud, too. In that way this case is different from the usual one involving Section
2517(5), where the government gets permission to investigate one crime using a wiretap,
and while doing so happens upon an entirely different crime. Cf. United States v. Gotti,
42 F. Supp. 2d 252, 269–70 (S.D.N.Y. 1999) (Parker, J.) (evidence of access device fraud
was incidentally intercepted during the course of a lawfully executed order authorizing
the interception of communications relating to money laundering); United States v.
Giordano, 259 F. Supp. 2d 146, 153–155 (D. Conn. 2003) (evidence of sex offense with
minor was incidentally intercepted during the lawfully authorized interception of
communications relating to corruption and racketeering activities). Here, by contrast, the
government wiretapped phones seeking evidence of conduct that would violate both the
criminal statute for which wiretapping was authorized as well as another criminal law.
Defendants say that this sort of anticipated interception cannot count as incidental.
If the test were inadvertence, the defendants would be right. But that is not the
test. “Incidental,” not “inadvertent,” is the word used in Title III’s legislative history.
And, although the Second Circuit has sometimes used the word “inadvertent” in dicta,
10
more recent authority has implicitly rejected that gloss on the standard. Compare
Marion, 535 F.2d at 701 (“Without a judge’s determination of inadvertence, Title III
authorization might rapidly degenerate into . . . the electronic equivalent of a general
search warrant.”) (internal quotation marks omitted), and Masciarelli, 558 F.2d at 1067
(when an officer “inadvertently comes upon evidence of another crime,” he should not be
required to “ignore” it), with In re Grand Jury Subpoena Served on John Doe, 889 F.2d
384, 388 (2d Cir. 1989) (finding that a wiretap, which was expected to reveal evidence of
both the authorized crime and another crime, intercepted evidence of the second crime
incidentally), and United States v. Wager, No. 00-Cr.-629, 2002 WL 31106351, at *2, *4
(S.D.N.Y. Sept. 20, 2002) (finding that evidence of securities fraud was intercepted
incidentally, despite the fact that the government’s original warrant application had noted
that there was probable cause of securities fraud); see also United States v. McKinnon,
721 F.2d 19, 22–23 (1st Cir. 1983) (“While an interception that is unanticipated is a
fortiori incidental, the converse is not true: something does not have to be unanticipated
to be incidental. Evidence of crimes other than those authorized in a wiretap warrant are
intercepted ‘incidentally’ when they are the by-product of a bona fide investigation of
crimes specified in a valid warrant.”); cf. United States v. Gambino, 734 F. Supp. 1084,
1094 n.14 (S.D.N.Y. 1990) (deciding not to reach the question whether the standard is
“inadvertent” or “incidental”). In In re Grand Jury Subpoena, the government expected
to, and did, intercept conversations relating to the “theft of federal, state and local taxes,”
although wiretapping was only authorized in connection with the state law crime of grand
larceny for the theft of state taxes. 889 F.2d at 388. Notwithstanding those expectations,
and notwithstanding that Section 2516 excludes federal tax crimes, the Second Circuit
11
held that the federal crime evidence was intercepted incidentally because it was a by-
product of the government’s bona fide investigation of state law crimes. Id. Here, too,
the interception of evidence of securities fraud was a by-product of the interception of
evidence of wire fraud.
According to the defendants, allowing the government to use wiretapping in any
insider trading case would subvert the intention of Congress, which has yet to add
securities fraud to the list of predicate offenses in Section 2516. (See Rajaratnam Br. at
60.) But this Court does not hold that insider trading is always good grounds for a
wiretap. It holds only that, when the government investigates insider trading for the bona
fide purpose of prosecuting wire fraud, it can thereby collect evidence of securities fraud,
despite the fact that securities fraud is not itself a Title III predicate offense. The
government must still show, as six judges found that it did in this case, that it is
investigating wire fraud in good faith. Defendants would have this Court bar the
government from using wiretaps for wire fraud investigations whenever the fraud
concerns securities.7 That is a carve-out Congress has not made and this Court is not
permitted to make in its stead.8
7
Defendants deny that they are asking for an absolute bar. (July 27, 2010 Hr’g Tr.
(“Tr.”) at 48.) They say the government may still use a wiretap where it demonstrates a
need to do so that is particularized to wire fraud, rather than to insider trading. This
makes little sense. To be sure, the government does have an obligation to show why a
wiretap is necessary in a particular investigation. But in a wire fraud investigation where
the underlying fraud is insider trading, the government’s showing of necessity will
always be linked to insider trading. (It will be required to show why alternative
investigative techniques would not suffice to ferret out the fraud in that case.) In practice
the defendants’ logic would limit the use of wiretaps to only those kinds of wire fraud,
like bank or computer fraud, where the underlying fraud is itself specified in Section
2516. That is not what the statute says.
8
It is true that, since adding wire fraud to Section 2516, Congress has added other kinds
of fraud to the statute—access device fraud in 1986, bank fraud in 1990, aircraft parts
12
Assuming that the government’s wiretap applications established both probable
cause and necessity—issues that the Court is about to address—the wiretap applications
here were approved in accordance with Title III. Therefore, under Section 2517(5), the
government can introduce evidence of insider trading it discovered on the wiretaps as
long as the government applied to do so “as soon as practicable.” 18 U.S.C. § 2517(5).
On October 14, 2009, just before Rajaratnam’s arrest, the government applied for and
Judge Preska issued an order allowing the government to introduce wiretap evidence of
securities fraud. (See Gov’t Opp’n to Rajaratnam Ex. 9.)9 Accordingly, the government
can introduce wiretap evidence under Section 2517(5).
fraud in 2000, computer fraud in 2001—without adding securities fraud. (See

Rajaratnam Reply Br. at 37.) Congress inserted offenses like bank and computer fraud to
Title III because it wanted to permit wiretapping to investigate those crimes even where
they do not involve the use of a wire. As the government observed at oral argument,
“[n]ot every bank . . . or computer fraud may involve wires. There are cases that don’t.”
(Tr. 56.) Securities fraud may be committed without a wire, too, and in such cases, Title
III precludes wiretapping. But that does not mean it precludes wiretapping in insider
trading cases where a wire is involved.
9
The government may have had authorization well before that time. The Second Circuit
has long held that “authorization under 18 U.S.C. § 2517(5) may be inferred when a
judicial officer grants a continuation of the surveillance, even though the offense was not
listed in the original order, so long as he was made aware of ‘material facts constituting
or clearly relating to [the] other offenses’ in the application for the continuance.” United
States v. Ardito, 782 F.2d 358, 362 (2d Cir. 1986) (quoting United States v. Masciarelli,
558 F.2d 1064, 1067-1068 (2d Cir. 1977)). The government’s applications to renew the
Rajaratnam and Chiesi wiretaps clearly provided the issuing judges with notice that
another offense, securities fraud, was implicated by the intercepts. Because courts
“presume . . . that in renewing the tap the judge carefully scrutinized those supporting
papers and determined that the statute’s requirements had been satisfied,” United States v.
Marion, 535 F.2d 697, 703 (2d Cir. 1976), the renewal orders sufficed to provide Section
2517(5) approval. See United States v. Tortorello, 480 F.2d 764, 783 (2d Cir. 1973),
cert. denied, 414 U.S. 866 (1974) (“It is enough [for Section 2517(5)] that notification of
the interception of evidence not authorized by the original order be clearly provided in
the renewal and amendment application papers.”).
13
II. Probable Cause
A. Standard
Title III requires that law enforcement provide the authorizing court with a “full
and complete statement of the facts and circumstances relied upon by the applicant” to
establish probable cause that the target phone was and would continue to be used to
commit the specified offense of wire fraud. 18 U.S.C. § 2518(1)(b). “The standard for
probable cause applicable to § 2518 is ‘the same as the standard for a regular search
warrant.’” United States v. Diaz, 176 F.3d 52, 110 (2d Cir. 1999) (quoting United States
v. Fury, 554 F.2d 522, 530 (2d Cir. 1977)).
“[P]robable cause is a fluid concept—turning on the assessment of probabilities in
particular factual contexts—not readily, or even usefully, reduced to a neat set of legal
rules.” Illinois v. Gates, 462 U.S. 213, 232 (1983). “While probable cause requires more
than a ‘mere suspicion’ of wrongdoing, its focus is on ‘probabilities,’ not ‘hard
certainties.’” Walczyk v. Rio, 496 F.3d 139, 156 (2d Cir. 2007) (quoting Gates, 462 U.S.
at 231) (internal citation omitted). “[P]robable cause does not demand any showing that
a good-faith belief be ‘correct or more likely true than false.’ It requires only such facts
as make wrongdoing or the discovery of evidence thereof probable.” Walczyk, 496 F.3d
at 157 (quoting Texas v. Brown, 460 U.S. 730, 742 (1983)) (internal citation omitted). “In
determining whether probable cause for an eavesdropping warrant exists, the issuing
officer need only make a practical, common sense decision whether, given the ‘totality of
the circumstances’ set forth in the affidavit requesting such warrant, including the
veracity and basis of knowledge of persons supplying hearsay information, there is a fair
probability that evidence of a crime will be obtained through the use of electronic
14
surveillance.” United States v. Funderbunk, 492 F. Supp. 2d 223, 237 (W.D.N.Y. 2007)
(quoting Gates, 462 U.S. at 238); see also Diaz, 176 F.3d at 110. Allegations in an
affidavit “should be read in their entirety and in a common-sense manner with each fact
gaining color from the others,” rather than “in isolation” from one another. Gotti, 42 F.
Supp. 2d at 262.
“[A] reviewing court must accord considerable deference to the probable cause
determination of the issuing [judge].” Walczyk, 496 F.3d at 157; see United States v.
Concepcion, 579 F.3d 214, 217 (2d Cir. 2009) (“[W]e grant considerable deference to the
district court’s decision whether to allow a wiretap . . . .”); United States v. Miller, 116
F.3d 641, 663 (2d Cir. 1997) (“In reviewing a ruling on a motion to suppress wiretap
evidence, we accord deference to the district court . . . .”); United States v. Torres, 901
F.2d 205, 231 (2d Cir. 1990), cert. denied, 498 U.S. 906 (1990) (“The role of an appeals
court in reviewing the issuance of a wiretap order . . . is not to make a de novo
determination of sufficiency as if it were a district judge, but to decide if the facts set
forth in the application were minimally adequate to support the determination that was
made.”). The reviewing court’s task is “limited to determining whether that judicial
officer had a ‘substantial basis’ for her determination.” Gotti, 42 F. Supp. 2d at 262
(quoting Gates, 462 U.S. at 239). Nevertheless, little or no deference is due where the
government’s affidavit misstated or omitted material information about probable cause.
See United States v. Canfield, 212 F.3d 713, 717 (2d Cir. 2000) (“In this situation, the
issuing judge’s probable cause determination is not due any deference because he did not
have an opportunity to assess the affidavit without the inaccuracies.”).
15
Where a defendant makes a preliminary showing that the government’s affidavit
misstated or omitted material information, Franks instructs a district court to hold a
hearing to determine if the misstatements or omissions were made intentionally or with
reckless disregard, and if so, determine de novo whether, “after setting aside the
falsehoods, what remains of the warrant affidavit is insufficient to support a finding of
probable cause.” United States v. Coreas, 419 F.3d 151, 155 (2d Cir. 2005).10
“Omissions from an affidavit that are claimed to be material are governed by the same
rules.” United States v. Ferguson, 758 F.2d 843, 848 (2d Cir. 1985). But “[i]f an
affidavit can be challenged because of material omissions, the literal Franks approach no
longer seems adequate because, by their nature, omissions cannot be deleted.” United
States v. Ippolito, 774 F.2d 1482, 1486 n.1 (9th Cir. 1985). “The ultimate inquiry is
whether, after putting aside erroneous information and [correcting] material omissions,
there remains a residue of independent and lawful information sufficient to support
probable cause.” Canfield, 212 F.3d at 718 (internal quotation marks omitted).
B. Rajaratnam’s Claims
Rajaratnam contends that the government’s application and supporting affidavit
dated March 7, 2008,11 (1) made false allegations regarding Roomy Khan’s reliability and
10
The government argues that, “to the extent [the defendants’] challenges . . . don’t
involve alleged omissions and inaccuracies, the judicial determination warrants
considerable deference.” (Tr. at 58.) But it is hard to imagine how exactly this would
work in practice. Reading the March 7, 2008 Kang Affidavit as a whole, Judge Lynch
found probable cause. But how did he reach that conclusion? By relying exclusively on
Khan’s allegations? By deciding that the Goel tips added something to the case for
probable cause? Short of asking Judge Lynch himself, it is not possible to know. Put
simply, there are no determinate findings (besides the finding of probable cause itself) for
this Court to defer to.
11
This is the crucial affidavit; if its deficiencies justify suppression, they justify
suppression of all the wiretap intercepts, even those obtained on the strength of
16
(2) mischaracterized other evidence referenced in the affidavits. As noted, he sought a
Franks hearing to probe this issue.12 The Court denied defendant’s request for a hearing
on the issue of probable cause in summary form in its order of August 15, 2010. The
Court now sets forth its reasoning.
1. Legal Standard
Under Franks, a defendant may obtain an evidentiary hearing where (1) “the
defendant makes a substantial preliminary showing that a false statement knowingly and
intentionally, or with reckless disregard for the truth, was included by the affiant in the
warrant affidavit,” and (2) “the allegedly false statement is necessary to the finding of
probable cause.” 438 U.S. at 155–56. To have misled knowingly or recklessly, the
government must have done more than make an intentional decision not to include the
information. Instead, the misleading statement or omission must have been “designed to
mislead” or “made in reckless disregard of whether [it] would mislead.” United States v.
subsequent applications. See United States v. Giordano, 416 U.S. 505, 531-533 (1974)
(Because “communications intercepted pursuant to the extension order were evidence
derived from the communications invalidly intercepted pursuant to the initial order,” they
are “derivative evidence and must be suppressed.”). The converse is also true: if the
March 7, 2008 affidavit adequately supported Judge Lynch’s decision to authorize a 30-
day wiretap, any deficiencies in subsequent wiretap applications are of no consequence.
The first 30 days of wiretapping Rajaratnam yielded enough evidence of criminal conduct
to justify renewals of the wiretap.
12
Rajaratnam’s brief implies that even if a Franks hearing is not warranted, the Court
should nevertheless suppress the wiretap intercepts under Section 2518(10)(a)(i) because
the government failed to supply a “full and complete statement” explaining the basis for
probable cause and the reasons why alternative investigative techniques would not be
feasible. (See Rajaratnam Br. at 56; see also Tr. at 17 (“The full and complete statement
standard in Title III is actually distinct from the constitutional standard in Franks.”); Tr.
116–17.) But that argument, for which the brief cites no authority, is inconsistent with
the law of this circuit. See United States v. Bianco, 998 F.2d 1112, 1125-26 (2d Cir.
1993) (holding that the Franks standard governs the determination whether suppression is
appropriate under Section 2518(10)(a)).
17
Awadallah, 349 F.3d 42, 68 (2d Cir. 2003) (quoting United States v. Colkley, 899 F.2d
297, 300–01 (4th Cir. 1990) (formatting normalized)).
The meaning of recklessness is not “self-evident.” United States v. Mandell, 710
F. Supp. 2d 368, 373 (S.D.N.Y. 2010). The Supreme Court in Franks did not define the
term “reckless disregard” other than to state that “[a]llegations of negligence or innocent
mistake are insufficient.” Franks, 430 U.S. at 171. Nor has the Second Circuit
conclusively defined “reckless disregard.” United States v. Perez, 247 F. Supp. 2d 459,
473 (S.D.N.Y. 2003). Nevertheless, “most circuits that have considered the question
have embraced a subjective test for recklessness.” United States v. Vilar, No. 05-CR-
621, 2007 WL 1075041, at *26 (S.D.N.Y. Apr. 4, 2007) (Karas, J.).
Under that test, as one court in this Circuit has phrased it, “the question is not
what a reasonably prudent person would have appreciated given the attendant
circumstances but rather whether the defendant in fact entertained serious doubts as to the
truth of the subject statements.” United States v. Kunen, 323 F. Supp. 2d 390, 395
(E.D.N.Y. 2004) (internal quotation marks omitted); see also Vilar, 2007 WL 1075041, at
*26 (“[O]ne ‘recklessly disregards’ the truth when one makes allegations while
entertaining serious doubts about the accuracy of those allegations.”). Indeed, numerous
lower courts in this Circuit have employed the “serious doubts” language. See Mandell,
710 F. Supp. 2d at 373; Vilar, 2007 WL 1075041, at *26; United States v. Harper, No.
05-CR-6068, 2006 WL 2873662, at *8 (W.D.N.Y. Oct. 6, 2006); United States v.
Goldenberg, No. 05-CR-1034, 2006 WL 266564, at *4 (S.D.N.Y. Feb. 3, 2006); Perez,
247 F. Supp. 2d at 473, 479; United States v. Markey, 131 F. Supp. 2d 316, 324 (D.
Conn. 2001); Kunen, 323 F. Supp. 2d at 395. Other Courts of Appeals have used the
18
same language. See United States v. Butler, 594 F.3d 955, 961 (8th Cir. 2010); United
States v. Lowe, 516 F.3d 580, 584 (7th Cir. 2008); Miller v. Prince George’s County,
Md.., 475 F.3d 621, 627 (4th Cir. 2007); United States v. Ranney, 298 F.3d 74, 78 (1st
Cir. 2002); Wilson v. Russo, 212 F.3d 781, 788 (3d Cir. 2000); Hart v. O’Brien, 127 F.3d
424, 449 (5th Cir. 1997), abrogated in part on other grounds by Kalina v. Fletcher, 522
U.S. 118 (1997); Beard v. City of Northglenn, Colo., 24 F.3d 110, 116 (10th Cir. 1994).
While the test for recklessness may be subjective, it is not wholly so and there are
objective aspects to its application. Thus, “[t]here is a corollary to the ‘serious doubt’
standard: ‘Because states of mind must be proved circumstantially, a fact finder may infer
reckless disregard from circumstances evincing ‘obvious reasons to doubt the veracity of
the allegations.’ ” Perez, 247 F. Supp. 2d at 473 (quoting United States v. Whitley, 249
F.3d 614, 621 (7th Cir. 2001)); see also United States v. Schmitz, 181 F.3d 981, 986-87
(8th Cir. 1999); Ranney, 298 F.3d at 78; Beard, 24 at 116; Vilar, 2007 WL 1075041, at
*27; Markey, 131 F. Supp. 2d at 324. Hence, as to any misstatements in the May 7, 2008
affidavit, Rajaratnam must prove either that “(1) the drafters of the affidavit made [a false
statement] with knowledge that the statement was false, (2) they had a serious doubt as to
the truth of the statement when they made it, or (3) they had obvious reason to doubt the
veracity of the statement.” Perez, 247 F. Supp. 2d at 474 (emphasis added).
As might be expected, the guideposts for determining recklessness are different
when evaluating the alleged omission of material information. It makes little sense after
all to speak of whether the affiant has ‘serious doubt’ about the veracity of statements not
made. Rather the inquiry, at least in this circuit, is whether the “omitted information was
clearly critical to assessing the legality of the search.” United States v. Reilly, 76 F.3d
19
1271, 1280 (2d Cir. 1996) (internal quotation marks omitted). Accordingly, with respect
to material omissions from the March 7, 2008 affidavit, Rajaratnam must prove that the
drafters of the affidavit either intentionally omitted the information or that the omitted
information was clearly critical to the affidavit, thereby raising an inference of
recklessness.13
2. Knowingly or Recklessly False Statements and Omissions
In support of probable cause, the March 7, 2008 Kang Affidavit offered several
pieces of evidence: (1) statements made by Roomy Khan, a cooperating witness, about
exchanging inside information with Rajaratnam; (2) statements Rajaratnam made to Khan
in telephone conversations she recorded at the FBI’s request; and (3) summaries of
13
There is some disagreement among the Courts of Appeals, and within this Court, as to
whether recklessness can be established where a reasonable affiant would know that
omitted information would be important to the reviewing court. That divide stems from
the Third Circuit’s statement that “omissions are made with reckless disregard if an
officer withholds facts in his ken that ‘[a]ny reasonable person would know was the kind
of thing the judge would wish to know.’” Wilson, 212 F.3d at 788 (quoting United States
v. Jacobs, 986 F.2d 1231, 1235 (8th Cir. 1993)). Two decisions have cited this statement
in holding that the standard for omissions is whether “any reasonable person would have
known that this was the kind of information that the magistrate judge would have wanted
to know.” Perez, 247 F. Supp. 2d at 474 (Chin, J.); United States v. Harding, 273 F.
Supp. 2d 411, 426 (S.D.N.Y. 2003) (Kaplan, J.) (“[T]he preliminary issue to be resolved
is whether Harding has shown that Agent Castro knew or had reason to know the ‘facts’
he omitted from the search warrant affidavit. If these facts indeed were ‘in his ken,’ the
following question is whether they were the sort of facts a reasonable person would know
a judge would want to know.”). On the other hand, in Judge Karas’s view, “a test that
invokes the mythical ‘reasonable person’ speaks the language of negligence” which is
insufficient for suppression under Franks. Vilar, 2007 WL 1075041, at *27. This Court
agrees. Unlike negligence, reckless disregard connotes “[c]onscious indifference to the
consequences of an act.” Black’s Law Dict. (9th ed.). The “serious doubt” standard for
misstatements reflects that awareness, as does the corollary that with regard to omissions,
recklessness “may be inferred when omitted information was clearly critical to assessing
the legality of the search”. United States v. Reilly, 76 F.3d 1271, 1280 (2d Cir. 1996)
(internal quotation marks omitted).
20
conversations intercepted over wiretapped telephones belonging to Craig Drimal, who
worked out of Galleon’s offices, and Zvi Goffer, who worked as a trader for Galleon.
Describing the “Background of the Investigation,” the affidavit said that,
“[b]eginning in or about November 2007 [Agent Kang] and other FBI agents have had
numerous discussions with a cooperating source (‘CS-1’)” we now know to be Khan.
(Gov’t Opp’n to Rajaratnam Ex. 1-C at 12.) According to Agent Kang, Khan “ha[d] been
cooperating with the FBI since approximately November 2007.” (Id. at 13 n. 4.) Kang
further stated that “since at least in or about 2005, [Khan] participated in an insider
trading scheme;” that Khan “received the material, nonpublic information from a variety
of sources, . . . including RAJARATNAM”; and that Khan “has not yet been charged
with any crimes.” (Id. at 13.) The affidavit notes that Khan has known Rajaratnam
“since in or about the mid-1990s, when [s]he was working at Intel Corp,” and that she
subsequently “worked for Galleon from approximately mid-1998 through 1999.” (Id. at
13 n.5.) It goes on to say that the two exchanged inside information beginning “in or
about mid-2005” and continuing till “late 2007.” (Id. at 13-14.)
This is what the affidavit left out: The FBI and U.S. Attorney’s Office for the
Northern District of California began investigating Khan in 1998 when she was working
at Intel, in connection with allegations that she was sending inside information about her
company to Rajaratnam’s firm. (Rajaratnam Br. Ex. A.5 at 2-3.) In 2001 Khan was
indicted and later that year pleaded guilty to felony wire fraud and was sentenced to
probation.14 (Rajaratnam Br. Ex. A.3, A.4 ¶¶ 1–2; Ex. A.6 at 2, 4.) At Khan’s sentencing
14
Khan’s 2001 criminal case, No. 01-20029 (N.D. Cal.), remained under seal in the
Northern District of California, for reasons not explained, until late 2009. On October
16, 2009, the government unsealed the criminal complaint against Rajaratnam in this
21
in 2002, the government emphasized that Khan was cooperating with the government,
that it had attempted to establish insider trading by Rajaratnam without success, and that
its investigation was “continuing.” (Rajaratnam Br. Ex. A.5 at 3, 7-8.)
The government thinks that none of this makes the Kang affidavit false. It says
that Kang did not mean to imply that the investigation in this district, which began in
2007, was the ‘only’ time Khan and Rajaratnam were ever investigated for insider
trading. And, according to the government, when Kang said that Khan had not yet been
charged, he only meant that she had not been charged in connection with this
investigation. The way the government parses Kang’s grammar may be literally right.
But the statements were nonetheless misleading, particularly when read with the literally
false statement that Khan had been cooperating with the FBI only since November 2007.
And Judge Lynch was invited to conclude that, so far as the government knew, Khan had
a clean record when in fact she had previously been charged and convicted of very
similar conduct, raising obvious questions as to her credibility.
The government cannot write these omissions off on the theory that Khan’s
criminal record was not important enough to include in the affidavit.15 If that were true,
case, which had identified Khan as “CW.” Khan’s true identity was reported by the Wall
Street Journal on October 22, 2009. Susan Pulliam, Galleon Sinks, Informant Surfaces,
Wall St. J., Oct. 22, 2009. The same day, the San Jose Mercury News reported that Khan
had pled guilty to wire fraud in 2001 “for leaking proprietary information about Intel”
while working there in 1998. Pete Carey, Old Silicon Valley Case Linked to Hedge Fund
Scandal, San Jose Mercury News, Oct. 22, 2009. The San Jose Mercury News and
Rajaratnam subsequently asked the California district court to unseal the entire case, and,
on December 2, 2009, that court granted the unopposed motion.
15
Indeed, at oral argument the government acknowledged that “in hindsight there is no
question [the fact of the earlier investigation of Khan and Rajaratnam] should have been
included” (Tr. at 65) and that the government “wish[es] it would have been included” (Id.
at 66). This is the type of candor that the Court expects from the government and,
frankly, should have been exhibited to Judge Lynch.
22
why did the government deem it worthy to report that Khan “[ha[d] not yet been charged
with any crimes”? (Kang Ex. 1 at 13.) Nor can the government plead ignorance. Agent
Kang’s own interview memoranda, produced to the defendants in discovery in this case,
chart the extent of his knowledge: a December 17, 2007 memo refers to Khan’s “past
criminal record,” and a November 28, 2007 memo refers to “some problems KHAN had
in the past with the FBI.” (See Rajaratnam Br. Ex. A.17 at 2; Ex. A.16 at 2.)16
Nor does the Kang affidavit’s summary of telephone conversations between Khan
and Rajaratnam win high marks for candor. (Gov’t Opp’n to Rajaratnam Ex. 1-C at 15-
17.) Describing one such conversation, on January 14, 2008, Kang’s affidavit said that
[d]uring this call, CS-1 asked RAJARATNAM what was “going on with the
earnings this season,” and whether he was “getting anything on Intel.”
RAJARATNAM proceeded to tell CS-1 that Intel would be up 9 to 10% and then
guide down 8% and that margins would be good. RAJARATNAM then asked
CS-1 “What are you hearing anything?” CS-1 responded “not really.”
(Id. at 15–16.) That paraphrase omitted the fact that Rajaratnam had qualified his
predictions with “I think.” It also skipped a piece of the conversation in which
Rajaratnam said that he thought margins the next quarter “will be below,” and explained
that he took this view “[b]ecause of [sic] the volumes are down, right?” (Rajaratnam Br.
16
Rajaratnam cites additional omissions that supposedly bore on Khan’s credibility, but
these are not obvious examples of recklessness. For example, in interviews with the FBI
Khan denied her involvement in the insider trading scheme before admitting to it. That
fact adds little to an assessment of Khan’s credibility. It is hardly surprising, or unusual,
for an accused individual to deny having committed a crime before confessing to it.
Rajaratnam also points to information that came to light after March 2008. In April
2008, Kang learned that, a few months earlier, Khan had deleted an email without telling
the government, “because she was scared,” and that she had also secretly registered a cell
phone in her gardener’s name, presumably to hide calls from the government. (See
Rajaratnam Br. Ex. 20 at 5; Ex. 21 at 1.) These actions are of relevance to Khan’s
credibility, but the government did not discover them until after it had already gotten
wiretap authorization from Judge Lynch in March 2008. (See Tr. 90-91; Gov’t Opp’n to
Rajaratnam at 39-41.)
23
Ex. D.1 at 2–3.) In the government’s paraphrased version of the conversation,
Rajaratnam seems certain about the Intel numbers without giving any reason why; in the
transcript, Rajaratnam equivocates (“I think”) and explains at least why he thought
margins would decline the following quarter (“volumes were down”).
Kang’s affidavit also paraphrased a January 17, 2008 call between Rajaratnam
and Khan:
During this call, CS-1 asked whether RAJARATNAM had heard anything on
Xilinx. RAJARATNAM responded that he thought this quarter would be okay,
but next quarter would not be so good. . . . RAJARATNAM then said he expected
Xilinx to be “below the street.” CS-1 asked whether he got “it” from someone at
the company and RAJARATNAM said yes, somebody who knows.
(Id. at 16–17.) This paraphrase also subtly changed Rajaratnam’s answer. In the audio
recording, Khan asks whether Rajaratnam “got it from somebody at the company or—.”
Rajaratnam appears to answer, “Yeah I mean, somebody who knows his stuff.”
(Rajaratnam Br. Ex. D.2 at 4.)17 That response is more equivocal than the government’s
paraphrase (a simple “yes, somebody who knows”) lets on.18 Such subtle shifts of
17
The government now claims “it is not at all clear from the recording” that this is what
Rajaratnam said. (See Gov’t Opp’n to Rajaratnam at 45.) But, having listened to the
recording for itself, the Court believes the transcript is accurate. In any event, if the
government truly believed that the recording was ambiguous, it should have said so to
Judge Lynch, not quoted the most inculpatory version of Rajaratnam’s words.
18
Other misstatements about the content of Khan’s recordings appear to be instances of
simple carelessness on the government’s part. Kang’s affidavit claimed that, when
Rajaratnam asked Khan what she was hearing on Google, she “did not respond.” (Gov’t
Opp’n to Rajaratnam Ex. 1-C at 16.) Actually, Khan did respond. She said, “The
market’s been so shitty that I haven’t been, it’s only now that I’ve started to do the
work.” (Rajaratnam Br. Ex. D.1 at 6.) This was not an omission designed to mislead.
Indeed, had the government reproduced more of the conversation on Google, more
evidence of probable cause might have emerged. When Rajaratnam again asked about
Google, Khan said she had no information, and explained, “I told you that lady won’t
speak to me.” Rajaratnam’s response: “Idiot.” (See Rajaratnam Br. Ex. D.1 at 7.) “That
lady” turns out to have been an investor relations person at Google. The most plausible
24
meaning are not as compelling as direct misstatements and omissions, however, they
evince a lack of frankness that should be found in all ex parte applications.
3. Materiality to Judge Lynch’s Decision
The inaccuracies and inadequacies in the Kang affidavit give the Court pause.
Particularly disturbing is the omission of highly-relevant information regarding Khan’s
prior criminal record for fraud which is “peculiarly probative of credibility.” United
States v. Hayes, 553 F.2d 824, 827 (2d Cir. 1977). Still, a Franks hearing is required
only if the government’s misstatements were necessary to Judge Lynch’s decision to
authorize the wiretap. That is, after setting aside the government’s misstatements and
adding what it omitted from the affidavit, does the Court find that the affidavit set forth
minimally adequate facts to establish probable cause? See Coreas, 419 F.3d at 155.
Rajaratnam contends that, with “Khan’s lack of credibility and reliability
accurately disclosed,” her “general allegations” should be “discarded.” (Rajaratnam Br.
at 55.) This would go too far. True, “a criminal informer is less reliable than an innocent
bystander with no apparent motive to falsify.” United States v. Gagnon, 373 F.3d 230,
236 (2d Cir. 2004) (internal quotation marks omitted). But even a criminal informer can
provide evidence of probable cause, particularly when other indicia of the evidence’s
explanation for Rajaratnam’s exclamation is that the Google employee refused to provide
inside information about her company.
Kang’s affidavit also said that Rajaratnam predicted Intel’s revenues accurately (“up 9 to
10%). (Gov’t Opp’n to Rajaratnam Ex. 1-C at n.8.) The affidavit mistakenly calculated
the percentage jump in earnings by comparing earnings in fourth quarter 2007 to fourth
quarter 2006, which yielded a percentage increase of 10.5%. What Rajaratnam was
actually predicting was the percentage increase in Intel’s earnings for the fourth quarter
of 2007 as compared to the third quarter of that year (an increase of only six percent).
(See Rajaratnam Br. at 29-30.)
25
reliability exist. See United States v. Fermin, 32 F.3d 674, 676–77 (2d Cir. 1994),
overruled on other grounds by Bailey v. United States, 516 U.S. 137 (1995) (excusing the
government’s failure to accurately report a confidential informant’s “criminal history and
time as an informant” because the issuing judge would not “have completely discounted
the evidence presented through” the informant, given the informant’s “past reliability”
and “corroborating evidence in the affidavit”); United States v. Levasseur, 816 F.2d 37,
43–44 (2d Cir. 1987) (holding that the government’s failure to outline an informant’s
“full history of pre- and post-cooperation criminal activity, drug and alcohol abuse, and
psychiatric problems” did not require a Franks hearing, because other “independent and
lawful information” sufficed to establish probable cause).19
Here, there were such indicia. For one thing, Khan was a known informant, not
an anonymous tipper. That strengthens the case for believing her. See Caldarola v.
Calabrese, 298 F.3d 156, 163 (2d Cir. 2002) (quoting Florida v. J.L., 529 U.S. 266, 270
(2000)) (“[A]n anonymous tip is ‘[u]nlike a tip from a known informant whose reputation
can be assessed and who can be held responsible if her allegations turn out to be
fabricated.’”). And, in implicating Rajaratnam in crimes of insider trading, Khan made
statements against her own penal interest. “Admissions of crime . . . carry their own
indicia of credibility—sufficient at least to support a finding of probable cause to search.
That the informant may be paid or promised a ‘break’ does not eliminate the residual risk
19
Rajaratnam’s reply brief points out that none of the cases the government cites—
Fermin, Canfield, and Levasseur, all cases in which the Second Circuit excused the
government’s failure to disclose an informant’s prior criminal conviction—involved a
prior conviction for fraud. (Rajaratnam Reply Br. at 7 (citing United States v. Hayes, 553
F.2d 824, 827 (2d Cir. 1977), for the proposition that a prior fraud conviction is
“peculiarly probative of credibility”).) That is true, but it does not mean that Khan’s
credibility stood at zero.
26
and opprobrium of having admitted criminal conduct.” United States v. Harris, 403 U.S.
573, 583–84 (1971) (plurality opinion).20 Khan admitted, among other things, that she
had provided Rajaratnam with inside information about Google. That statement exposed
her to greater criminal penalties—by the government’s calculation, the profits from
trading on this information exceeded $6 million. (See Gov’t Opp’n to Rajaratnam Ex. 1-
C, ¶ 18 n.9.)
In addition to all this, the government was able to corroborate some of Khan’s
statements. See Canfield, 212 F.3d at 719-20 (quoting United States v. Wagner, 989 F.2d
69, 73 (2d Cir. 1993) (“[I]f an informant’s declaration is corroborated in material
respects, the entire account may be credited, including parts without corroboration.”).
Khan told the FBI that Rajaratnam had previously provided her with earnings information
on Broadcom; in a call she recorded at the FBI’s request, Rajaratnam told her he knew
someone “very good” at Broadcom who could give him “the numbers” (Gov’t Opp’n to
Rajaratnam Ex. 1-C at 17). Similarly, Rajaratnam’s statement on a recorded call that he
needed to call “a couple guys” at Xilinx to get information from them squares with
Khan’s statement to the FBI that Rajaratnam had previously bragged about receiving
inside information on Xilinx. (Id. at 16.) Trading records also provide limited
corroboration of certain of Khan’s statements. For example, Khan claimed to have
provided Rajaratnam with inside information about Polycom in January 2006 and Google
20
To be sure, even admissions against penal interest are “suspect insofar as they
inculpate other persons.” Lilly v. Virginia, 527 U.S. 116, 138-39 (1999); see United
States v. Bakhtiar, 994 F.2d 970, 978 (2d Cir. 1993) (statements “made in an attempt to
minimize [one’s] own culpability, to shift blame to [another], or to curry favor with
authorities . . . do not bear the same indicia of reliability as the usual statement exposing a
declarant to unpleasant consequences, such as criminal liability”). But that does not
mean such admissions are no evidence of veracity—especially where, as here, the
admissions are not made in an attempt to reduce the individual’s share of the blame.
27
in the summer of 2007; trading records show that Rajaratnam’s funds executed profitable
trades in those two securities during the relevant time periods. (See Gov’t Opp’n to
Rajaratnam Ex. 1-C n.6, n.9.) Finally, toll records indicate that Rajaratnam repeatedly
talked to an Intel insider, Rajiv Goel, in the run-up to earnings announcements in March
2006, April 2007, and February 2008. (See id. at 38.)
Given the evidence of corroboration, Khan’s allegations of Rajaratnam’s criminal
conduct provide at least some support for probable cause. But there is more.
Rajaratnam’s recorded telephone conversations with Khan independently show that he
intended to get information about stocks from company insiders. In advance of Xilinx’s
earnings announcement for the fourth quarter of 2007, Rajaratnam said he thought that
“Xilinx this quarter” had “turned out well”; when Khan asked “what do you think they’ll
do,” Rajaratnam said that he needed to “call a couple of guys there at Xilinx.”
(Rajaratnam Br. Ex. D.1 at 4.) In a conversation with Khan about Broadcom, Rajaratnam
told Kang that that “he knew somebody very good there who could give him the numbers
but that he had to check.” (Id. Ex. D.2 at 6.) The specificity of Rajaratnam’s comment
about Broadcom—he would get “the numbers”—is especially telling. Rajaratnam’s
alternate explanation for these remarks—that he meant he had to check with company
insiders about publicly available information—is hardly more plausible than the
government’s explanation. That Rajaratnam has an innocent explanation at all,
moreover, does not make the remarks irrelevant to probable cause. See Gagnon, 373
F.3d at 236 (“[P]robable cause does not demand the certainty we associate with formal
trials,” and “the fact that an innocent explanation may be consistent with the facts as
28
alleged . . . does not negate probable cause.”). Here, Rajaratnam’s answers created at
least a fair probability that insider trading was afoot.
The March 7, 2008 Kang Affidavit also contained summaries of and quotations
from intercepts of Craig Drimal’s and Zvi Goffer’s phones. Drimal worked out of
Galleon’s offices; Goffer was a trader there. (Gov’t Opp’n to Rajaratnam Ex. 1-C ¶¶ 20–
30.) These intercepts appear to indicate that Goffer and Drimal knowingly obtained
inside information and passed it on to others, including Rajaratnam. In September 2007,
Drimal gave a government cooperator (not Khan) the stock symbols of four companies
that were acquisition targets; he warned the cooperator to “be careful in trading the
securities of one of the companies on the list, because there were no public rumors that
the company was an acquisition target.” (Id. at 19–20.) Drimal later said to the
cooperator in recorded conversations that he did not want to talk about the four stocks on
the telephone, that it was “like shooting fish in a barrel,” and that he was nervous about
having too much success (presumably because it would raise eyebrows). (Id. at 20.)
Drimal told the cooperator that he had provided the same four stocks to Rajaratnam. (Id.
at 19.) Perhaps Rajaratnam accepted the tips innocently, without knowing they were
non-public. But assuming Drimal was right that one or more of these tips was completely
unexpected to the public, there is at least a fair inference that Rajaratnam, a sophisticated
investor, knew that.
The government also intercepted calls between Goffer and Drimal, and between
Goffer and another source of information. In one recorded call, Goffer mentioned to the
source that he had given Galleon a couple of “big calls” (which the affidavit interpreted
to mean tips), including a “call” on Bear Stearns, which “went up 13 dollars.” (Id. at 34.)
29
According to the affidavit, Goffer then said that Rajaratnam had one or two hundred
thousand shares, and that if Goffer had had as much conviction in the tipper as
Rajaratnam had, he would have made a lot of money. (Id.)
This evidence, taken alone, is far from conclusive of Rajaratnam’s culpability.
But to suffice for probable cause, it need not have been. See United States v. Martin, 426
F.3d 68, 76 (2d Cir. 2005) (calling it a “defect” to “conflate[] evidence of probable cause
to sustain a warrant with proof of a prima facie case,” because “probable cause does not
require a prima facie showing” of the crime); United States v. Bellomo, 954 F. Supp. 630,
638 (S.D.N.Y. 1997) (Kaplan, J.) (“While the intercepted conversations, considered
separately, may not be dispositive of guilt on the particular issues, that is not the relevant
standard.”). Adding it all up, and correcting the affidavit to account for the government’s
misstatements and omissions, the Court believes that there were enough facts for Judge
Lynch to have found probable cause.
C. Chiesi’s Claims
The case for probable cause against Chiesi relied exclusively on communications
intercepted pursuant to the Rajaratnam wiretap. Accordingly, were the Rajaratnam
wiretap evidence suppressed, suppression of the Chiesi wiretaps would likewise be
warranted. See Giordano, 416 U.S. at 533 (suppressing “derivative evidence” of a
suppressed wiretap). The government has acknowledged as much. (See Tr. at 142
(“[T]he government concedes that if the Rajaratnam wiretap falls, then the Chiesi one
does also on probable cause.”).) But that argument is moot in light of the Court’s
decision to deny Rajaratnam’s motion for suppression.
30
Chiesi argues separately that, even if the Rajaratnam wiretap intercepts survive
suppression, they do not establish probable cause of her participation in an insider trading
conspiracy. Because Chiesi does not suggest that the government misstated facts in its
application for authorization to wiretap Chiesi’s phones, the usual standard of “deference
to the probable cause determination of the issuing [judge]” applies. Walczyk, 496 F.3d at
157. So long as the “facts set forth in the application were minimally adequate to support
the determination that was made,” Concepcion, 579 F.3d at 217, suppression is not
warranted. See also Awadallah, 349 F.3d at 64 (“Ordinarily, a search or seizure pursuant
to a warrant is presumed valid.”).
The government first applied for authorization to wiretap Chiesi’s phones on
August 13, 2008. The application contained ample support for Judge Sullivan’s order
authorizing the wiretaps. The affidavit attached to the August 13 application (the
“August 13, 2008 Kang Affidavit”) described the interception of several calls between
Rajaratnam and Chiesi. It cited numerous plausible examples of inside information
Chiesi apparently gave to Rajaratnam concerning AMD, Akamai, IBM, and Microchip.
(See Gov’t Opp’n to Chiesi Ex. 1-C at 23–30.)
Consider the following evidence: in a pair of conversations between Rajaratnam
and Chiesi on June 6, 2008, the two discussed AMD’s upcoming quarterly earnings
announcement. During the first call, Chiesi said she had asked AMD’s chairman whether
AMD was “making the quarter,” and he had replied, “it’s close.” (Id. at 24.) Chiesi also
told Rajaratnam that the AMD chairman was “trying to put a deal together . . . [b]ut he
said they’re not close.” (Id. at 24–25.) In the second call, Chiesi told Rajaratnam that
AMD’s “quarter is suspect,” and he responded that she should “[s]hort” AMD stock,
31
“then go long before the deal . . . .” (Id. at 26.) Chiesi said she would “be very nimble
about it.” (Id.) This is sufficient evidence of probable cause, despite Chiesi’s description
of the information conveyed as “polite ether” (Chiesi Br. at 26) and a matter of public
knowledge (id. at 26–27). Chiesi rightly observes that the public knew an AMD deal
might happen, but the information given to Rajaratnam is more specific than that: it
concerns the timing of the deal, which itself may be material.
Other calls provided additional support for probable cause. In several calls
between July 24 and July 30, 2008, Chiesi and Rajaratnam discussed information about
Akamai. Chiesi said she had “just got a call from my guy” who said that the company
was going to “guide down”; that “people internally” believed the stock would go “down
to 25”; that they needed to be “radio silent”; and that she was telling Rajaratnam this
because they “share everything.” (Gov’t Opp’n to Chiesi Ex. 1-C at 28.) Later, Chiesi
told Rajaratnam that if “the stock gets killed,” her source would be “afraid,” and that “[i]f
he loses his job, I’ll get blamed for it.” (Id. at 29.) A reasonable inference is that the two
were dealing in inside information—why else would a company insider be worried about
losing his job if found out? Chiesi points out that, about this time, rumors were flying of
a potential downturn at Akamai. But Chiesi gave Rajaratnam specific numbers, not
vague speculation about the stock’s direction. Chiesi also told Rajaratnam that she had
learned from Microchip’s CEO that the company was going to “start buying back stock
on Monday.” (Id. at 27.) Although Microchip had previously announced that it was
buying back stock (see Chiesi Br. at 27–28), it had not announced the timing of that
buyback. Regardless of whether these facts establish Chiesi’s culpability, they are
certainly minimally adequate to support Judge Sullivan’s finding of probable cause.
32
III. Necessity
Both defendants argue that the government’s wiretap applications failed to
provide “a full and complete statement as to whether or not other investigative
procedures have been tried and failed or why they reasonably appear to be unlikely to
succeed if tried or to be too dangerous,” 18 U.S.C. § 2518(1)(c), as Title III requires.
Congress required that showing to ensure that “wiretapping is not resorted to in situations
where traditional investigative techniques would suffice to expose the crime.” United
States v. Kahn, 415 U.S. 143, 153 n.12 (1974). What Title III “envisions is that the
showing [of the wiretap’s necessity] be tested in a practical and commonsense fashion.”
Concepcion, 579 F.3d at 219 (quoting S. Rep. No. 90-1097, at 12).
Like a court reviewing an affidavit containing misstatements or omissions as to
probable cause, a court reviewing an affidavit for necessity must “decide if the facts set
forth in the application were minimally adequate to support the determination that was
made.” Torres, 910 F.2d at 231. In that determination, “generalized and conclusory
statements that other investigative procedures would prove unsuccessful” do not suffice.
United States v. Lilla, 699 F.2d 99, 104 (2d Cir. 1983). At the same time, however, Title
III “only requires that the agents inform the authorizing judicial officer of the nature and
progress of the investigation and of the difficulties inherent in the use of normal law
enforcement methods.” Concepcion, 579 F.3d at 218; see also United States v. Scala,
388 F. Supp. 2d 396, 404 (S.D.N.Y. 2005) (“[A] reasoned explanation, grounded in the
facts of the case, and which squares with common sense, is all that is required . . . .”)
33
(internal quotation marks omitted).21 The government is not “required to exhaust all
conceivable investigative techniques before resorting to electronic surveillance.”
Concepcion, 579 F.3d at 218; see also Fury, 554 F.2d at 530 (“At the outset we note that
the purpose of these ‘other investigative techniques’ requirements is not to foreclose
electronic surveillance until every other imaginable method of investigation has been
unsuccessfully attempted, but simply to inform the issuing judge of the difficulties
involved in the use of conventional techniques.”) (internal quotation marks omitted).
“Rather, the applicant must state and the court must find that normal investigative
procedures have been tried and failed or reasonably appear to be unlikely to succeed if
tried….” Giordano, 416 U.S. at 515. Put another way, “an affidavit offered in support of
21
In her briefs and at oral argument through counsel, Chiesi claims that the standard is
exhaustion of ordinary investigative techniques. (See Chiesi Br. at 13; Chiesi Reply Br.
at 6-7; Tr. at 137-139.) Chiesi quotes language from an opinion of the Tenth Circuit that
phrases the requirement in terms of exhaustion. See United States v. Castillo-Garcia, 117
F.3d 1179, 1188 (10th Cir. 1997), overruled on other grounds by United States v.
Ramirez-Encarnacion, 291 F.3d 1210 (10th Cir. 2002) (“[W]e require the government to
prove exhaustion—either by attempt or explanation of why the method would not work—
of all ‘reasonable’ investigatory methods.”) (emphasis added). However, even that
statement refers to exhaustion “either by attempt or explanation”, and the Tenth Circuit
has elsewhere described its decisions in this area as “repeatedly h[o]ld[ing] that law
enforcement officials are not required ‘to exhaust all other conceivable investigative
procedures before resorting to wiretapping.’” United States v. Edwards, 69 F.3d 419, 429
(10th Cir. 1995) (quoting United States v. Apodaca, 820 F.2d 348, 350 (10th Cir.), cert.
denied, 484 U.S. 903 (1987)). That is the law in this Circuit. See United States v. Torres,
901 F.2d 205, 231 (2d Cir. 1990) (The “purpose of the statutory requirements is not to
preclude resort to electronic surveillance until after all other possible means of
investigation have been exhausted by investigative agents . . . .”); United States v. Young,
822 F.2d 1234, 1237 (2d Cir. 1987) (“[T]here is no requirement that any particular
investigative procedures be exhausted before a wiretap may be authorized”) (internal
quotation marks omitted); see also United States v. Valdez, 90-793 (JFK), 1991 WL
41590, *2 (S.D.N.Y. Mar. 19, 1991), aff’d, 952 F.2d 394 (2d Cir. 1991) (“The law is
clear in this circuit that the requirements of section 2518 were not intended to turn
electronic surveillance into a tool of last resort.”).
34
a wiretap warrant must provide some basis for concluding that less intrusive investigative
procedures are not feasible.” Lilla, 699 F.2d at 103.
A. Rajaratnam’s Claims
In his motion, Rajaratnam argued that suppression was warranted because the
March 7, 2008 affidavit failed to disclose, inter alia, (1) the nature and extent of the
lengthy SEC investigation that preceded the wiretap request, and a prior FBI
investigation of Rajaratnam’s connection to insider trading; (2) the voluminous evidence
the SEC was able to collect using conventional techniques; and (3) the prosecutor’s total
access to and use of that evidence prior to the submission of its wiretap application to
Judge Lynch. (See Rajaratnam Br. at 65-73.) In an opinion issued last month, the Court
found that Rajaratnam had “at least established good grounds for holding a Franks
hearing regarding the veracity of the March 7, 2008 affidavit and the issue vel non of
whether the necessity requirement has been satisfied.” United States v. Rajaratnam, No.
09-CR-1184, 2010 WL 3219333, at *2 (S.D.N.Y. Aug. 12, 2010). A four-day hearing
was held from October 4 through October 7, 2010. At that hearing, Rajaratnam presented
four witnesses: Lindi Beaudreault, former counsel to Rajaratnam and Galleon; Andrew
Michaelson, formerly an attorney at the Division of Enforcement at the Securities and
Exchange Commission (“SEC”); Special Agent Kang; and Lauren Goldberg, a former
Assistant United States Attorney who led the investigation by the USAO and drafted the
March 7, 2008 affidavit. The Court’s findings based upon the hearing record are set forth
below.
35
1. Misstatements and Omissions
The Franks hearing established that the criminal authorities in this case made a
glaring omission. They failed to disclose to Judge Lynch that the SEC had for several
years been conducting an extensive investigation into the very same activity the wiretap
was intended to expose using many of the same techniques the affidavit casually affirmed
had been or were unlikely to be successful. A judge hearing an ex parte application relies
entirely on the government’s representation that it has disclosed all material facts. But
how could Judge Lynch assess whether conventional investigative techniques had failed
or were likely to fail without even knowing that they were presently being used in an
ongoing SEC investigation upon which the prosecutor and FBI were relying—almost
entirely—to construct their own case? Of course, there is nothing wrong in their
piggybacking the SEC investigation provided they were not improperly directing it. But
the Court is at a loss to understand how the government could have ever believed that
Judge Lynch could determine whether a wiretap was necessary to this investigation
without knowing about the most important part of that investigation—the millions of
documents, witness interviews, and the actual deposition of Rajaratnam himself, all of
which it was receiving on a real time basis and all of which was being acquired through
the use of conventional investigative techniques. It is all well and good to now argue that
these tools proved inadequate—and the Court ultimately accepts that contention—but it
would have been far better for Judge Lynch to have been in a position to make that
decision for himself.
The USAO and FBI first learned about the on-going investigation in March 2007,
when the SEC referred an investigation of insider trading by Rajaratnam and his brother
36
Rengan Rajaratnam, a principal at Sedna Capital Management, LLC. (Kang Ex. 3;
Franks Tr. at 95.) The SEC had opened its investigation, which was formally captioned
an investigation of Sedna, on September 21, 2006. (Michaelson Ex. 1-A.)22 On March
26, 2007, the USAO and FBI requested access to the SEC’s investigative file
(Michaelson Ex. 12) and three days later, the USAO and the FBI held the first of what
would be numerous meetings with the SEC to discuss the course of its investigation. (See
Kang Ex. 3.) Over the next year leading up to the March 7, 2008 wiretap application, the
SEC “ke[pt] the criminal authorities up to speed” (Franks Hr’g Tr. at 132-133) and met
and spoke with them regularly to discuss the investigation. (See id. at 128, 732; Kang
Exs. 3, 6, 7, 10, 11, 13, 14, 15, 17, 18, 20, 21, 23, 24, 25.) The SEC also provided the
criminal authorities with documents of particular note as well as chronologies outlining
circumstantial cases of insider trading and identifying likely sources of inside information
regarding several different companies. (Kang Exs. 4, 21, 22; Michaelson Exs. 59 84, 94,
95, 96, 97, 98, 100, 101, 106, 120.) Accordingly, the USAO and FBI either knew about
or had access to “the best of what the SEC could produce.” (Franks Tr. at 827-28.)
That was quite a bit to say the least. In early 2007, the SEC Office of Compliance
Inspections and Examinations (OCIE) began an on-site examination of Galleon. (Franks
Tr. at 112, 367; Michaelson Ex. 10.) As part of that investigation, OCIE made nearly two
dozen requests for numerous classes of documents, including trading records, telephone
22
Since November 5, 2003 the SEC had also been conducting a technically separate but
somewhat related investigation into insider trading at Galleon. (Beaudreault Ex. 4.) The
SEC had served Galleon with numerous subpoenas and requests for a variety of
documents, including trading and telephone records, and a complete record of Galleon e-
mails and instant messages (IMs) from November 2003 through June 2005. (Beaudreault
Ex. 5; Franks Tr. at 29-35.) Galleon produced documents in response to these requests
and subpoenas, which included the standard Form 1662 warning that information
provided to the SEC could be used in a criminal proceeding. (Franks Tr. at 30, 33.)
37
records, and a complete record of e-mails and IMs sent and received by Rajaratnam and
others in 2006. (Franks Tr. at 35-36, 112-120.) OCIE also interviewed eighteen
Galleon employees and twice interviewed Rajaratnam himself, once in February and once
in March of 2007, regarding insider trading. (See id. at 62-69.)
As part of the SEC investigation, Rajaratnam was deposed on June 7, 2007. (See
Michaelson Ex. 45.) He was asked numerous questions regarding insider trading at
Galleon, trading in various technology stocks, IMs exchanged with Roomy Khan, and his
connections to executives at several publicly traded companies. Rajaratnam denied that
he ever traded on, had any sources of, or even received any inside information. (Franks
Tr. 347-54; Michaelson Exs. 45 at 77, 84, 184.) The SEC also deposed five other
individuals associated with Sedna and/or Galleon, none of whom admitted to insider
trading. (Michaelson Exs. 46-50; Franks Tr. 190-93, 346-47.)
Following the Rajaratnam deposition, the SEC served Galleon with additional
subpoenas for various documents, including trading records, investor lists, and
Rajaratnam’s contact lists, hard drive, bank records, and calendar. Galleon produced four
million pages of documents in response to the subpoenas, including several hundred
thousand e-mails and almost fifty thousand pages of IMs. (Franks Tr. 38-40.) These
documents suggested that Rajaratnam was exchanging inside information by telephone.
(See Franks Tr. 398-408, 702; Gov’t Exs. 17, 24, 32.) As part of its investigation, the
SEC also served 221 subpoenas on banks, clearing houses, telephone companies, and
issuers of publicly traded securities prior to March 7, 2008. (Michaelson Exs. 52-56;
Franks Tr. at 195-97.)
38
The USAO and FBI knew about all of this. They knew about the OCIE
investigation, including that Galleon had produced documents and that the OCIE had
interviewed Galleon employees, including Rajaratnam. (Franks Tr. at 508-12, 731.)
They knew that Rajaratnam had been deposed and they received a transcript of that
deposition as well as of the five others the SEC had taken. (Michaelson Exs. 45, 51, 72;
Franks Tr. at 190-92, 507, 739-41). In fact, they knew in advance that the SEC was
going to depose Rajaratnam and, according to documents introduced at the hearing, met
with the SEC in part to “talk[] strategy” regarding that deposition. (Michaelson Ex. 26-
A; Tr. 139-45; 733-39.) They knew that the SEC had issued over two hundred subpoenas
from Galleon and third parties, that the SEC had received millions of documents in
response, and that they had full access to those documents. (Franks Tr. 729-31.) They
knew from the SEC’s chronologies that the SEC was building circumstantial cases of
insider trading and identified several possible sources of inside information, including
Khan and Rajiv Goel. (See, e.g. Michaelson Exs. 93-99; Franks Tr. at 732.) And they
knew from the same chronologies that the SEC had identified twelve individuals as
potential interviewees (Michaelson Ex. 84 at 2; Franks Tr. at 256-58, 703-4) and hoped
to review some additional records. (Michaelson Ex. 120.)
The USAO and FBI also knew that the SEC investigation was the most important
part of their own. Indeed, Agent Kang testified that the SEC knew more about the
investigation than he did. (Franks Hr’g Tr. at 614.) When asked by the Court to describe
what the federal criminal authorities did other than rely on the SEC, the government
prosecutor testified that the USAO and FBI had largely devoted their time to analyzing
the information they were receiving from the SEC, “assimilating their own analyses of
39
what all this information meant….” (Franks Hr’g Tr. at 828-29.) Though the criminal
authorities “independently obtained some of [their] own records, phone records, trading
records, bank records”, the prosecutor testified that “[w]hatever [they] obtained through
grand jury subpoenas would supplement what the SEC had provided.” (See id. (emphasis
added.)) The criminal authorities did not themselves review the SEC’s investigative file
but instead relied on the SEC to provide the most important documents. (Franks Tr. at
124, 614, 685.) And they decided to approach and interview Roomy Khan (and her
broker) in large part based on information provided by the SEC. (See Franks Tr. at 813.)
The USAO and the FBI also knew that all of this evidence was being developed
through conventional investigative techniques. But this was not disclosed to Judge
Lynch. Title III requires “a full and complete statement as to whether or not other
investigative procedures have been tried and failed or why they reasonably appear to be
unlikely to succeed if tried or to be too dangerous.” 18 U.S.C. § 2518(1)(c). By failing to
disclose the substance and course of the SEC investigation, the government made what
was nearly a full and complete omission of what investigative procedures in fact had been
tried. That omission deprived Judge Lynch of the opportunity to assess what a
conventional investigation of Rajaratnam could achieve by examining what the SEC’s
contemporaneous, conventional investigation of the same conduct was, in fact, achieving.
The government strenuously argues that it did not “hide” the existence of the SEC
investigation from Judge Lynch. But this misses the point. If anything, passing
references to having “reviewed trading records and other information provided by the
SEC” (Kang Ex. 1 at 15) obscures the fact that, on the record before the Court, the
prosecutor’s investigation was, in sum and substance, the SEC investigation, and its
40
results up until March 2008 were the product of entirely conventional investigative
techniques not disclosed to Judge Lynch. In light of the fact that the Kang Affidavit all
but ignored the SEC investigation—the elephant in the room—the boilerplate
representation that “alternative investigative techniques have been tried or appear
unlikely to succeed if tried” (Kang Ex. 1 at 38) remains just that—boilerplate.
As might be expected, this broad omission also rendered several specific
statements in the affidavit misleading. For example, the affidavit blandly assures Judge
Lynch that interviewing Rajaratnam and other targets is an “investigative route” that is
“too risky at the present time.” (Id. at 44-45.) Yet during that same time period, the
SEC, after asking the criminal authorities if they had any objection (Franks Tr. at 133,
142), had interviewed or deposed under oath over twenty Galleon employees, including
two interviews and a day-long deposition of Rajaratnam. The results of these
interrogations were promptly provided to the prosecutor and, in the case of Rajaratnam,
the prosecutor met with the SEC beforehand to discuss “strategy.” (Michaelson Ex. 26-
A; Tr. 139-45; 733-39.) The government now contends that the interview results were
useless and disclosure of a criminal as opposed to an SEC investigation would have been
harmful. Perhaps so, but that is the very decision a reviewing court, not the government,
should be making.
Cut of the same cloth is the representation that the conventional use of search
warrants “is not appropriate at this stage of the investigation, as the locations where . . .
records related to the scheme have not been fully identified, if at all.” (Kang Ex. 1 at 47.)
At that stage in the investigation—unknown to Judge Lynch—the government had, in
fact, accumulated or had access to four million Galleon documents obtained through
41
either SEC or grand jury subpoenas and had built a compelling circumstantial case of
insider trading in several securities. (See Kang Exs. 4, 21, 22; Michaelson Exs. 59 84,
94, 95, 96, 97, 98, 100, 101, 106, 120.) Moreover, the files were so extensive that the
government had not had the time to review them all and was relying on the SEC to do so.
(Franks Tr. at 124, 614, 685.) This is precisely the nuts and bolts of an investigation that
must be presented to a court if it is to fulfill its function of determining whether
conventional investigative techniques are likely to prove inadequate.23
Though less compelling, the Court is also troubled by the Kang affidavit’s
reference to the acquisition and review of trading records as an investigative technique.
While acknowledging that it had reviewed “certain” trading records, the affidavit goes on
to state that requesting more records “would jeopardize the investigation” because
“clearing firms . . . sometimes alert traders to the requests.” (Kang Ex. 1 at 44.) Fair
enough, but it would have been informative to have also disclosed that the SEC had
already issued over two hundred subpoenas for, inter alia, trading records, and that the
grand jury had issued such subpoenas as well, all apparently without jeopardizing its
investigation. The Court, of course, is not charged with fly-specking the government’s
affidavit and does not seek to do so. But stepping back to look at the forest, the
government in this case did not merely omit some discrete piece of information possibly
23
For much the same reason, the boilerplate assertion that “the issuance of grand jury
subpoena likely would not lead to the discovery of critical information,” (Kang Ex. 1 at
43) blinks reality. Grand jury subpoenas and SEC subpoenas had already led to a
mountain of incriminating circumstantial evidence as the impressively detailed
chronologies prepared by Mr. Michaelson fully attest. The government contends that the
reference to the inefficacy of grand jury subpoena was only meant to refer to witness
subpoenas. But of course that is the problem with falling back on boilerplate; unless
brought alive by disclosure of the course of the particular investigation at hand,
boilerplate serves little purpose.
42
relevant to a reviewing court’s analysis of necessity; it failed to disclose the heart and
soul of its investigation, without which a reasoned evaluation of the necessity of
employing wiretaps was impossible.
2. Suppression Analysis
Of course, the government’s omission is the beginning rather than the end of the
Court’s suppression inquiry, for a misleading affidavit alone is not grounds for
suppression. While the Franks analysis discussed above is typically employed to
evaluate misstatements and omissions relating to probable cause, the Second Circuit has
extended the Franks analysis to other Title III requirements for obtaining a warrant. See
United States v. Bianco, 998 F.2d 1112, 1125-26 (2d Cir. 1993) (applying Franks to 18
U.S.C. § 2518(11)(a)(ii), which requires that the government explain why “specification
of the place of interception is not practical”). And district courts in this Circuit have done
so with respect to the issue of necessity in particular. See United States v. King, 991 F.
Supp. 77, 88-90 (E.D.N.Y. 1998); United States v. Sanchez-Flores, No. 94-CR-864, 1995
WL 765562, at *5 (S.D.N.Y. Dec. 29, 1995). Cf. United States v. Guerra-Marez, 928
F.2d 665, 670-71 (5th Cir. 1991); United States v. Cole, 807 F.2d 262, 267-68 (1st Cir.
1986); Ippolito, 774 F.2d at 1485 (“although Franks dealt specifically with probable
cause, its reasoning applies [to Title III’s necessity requirement] as well”). Thus, to
warrant suppression on the issue of necessity, Rajaratnam must establish (1) that the
omissions from the Kang Affidavit regarding the necessity of using wiretaps were the
product of the government’s “deliberate falsehood” or “reckless disregard for the truth”,
and (2) that, after inserting omitted information and setting aside misstatements, the
43
affidavit fails to establish necessity. See Coreas, 419 F.3d at 155. Rajaratnam has
made the former showing but not the latter.
a. Reckless Disregard
Having heard the testimony of the government witnesses at the Franks hearing,
the Court comfortably concludes that no one acted with the deliberate intent to mislead
Judge Lynch. Recklessness, however, is another matter. As discussed in the probable
cause analysis, recklessness may be inferred when omitted information was “clearly
critical” to assessing the legality of employing a wiretap. Reilly, 76 F.3d at 1280. Here
the issue is whether the omission of information regarding the nature and scope of the
SEC investigation upon which the government’s own investigation was based would
have been critical to Judge Lynch in assessing whether conventional investigative
techniques would (or had) failed and, therefore, a wiretap was necessary. The Court,
putting itself in the shoes of the original reviewing court, has already answered that
question in the affirmative.
The government demurs, arguing that it could not have acted recklessly in failing
to disclose a “more detailed description of the SEC investigation” because it “did not
view that investigation as an investigative technique under control of the Criminal
Authorities.” (Gov’t Post Hr’g Opp’n at 22, 26). The Court finds this argument
unpersuasive for several reasons. As an initial matter, the government’s description of
the underlying issue as simply whether a “more detailed” description of the SEC
investigation was warranted reflects the very fundamental flaw in the original Kang
affidavit. The issue is not the accuracy of passing references to having received discrete
pieces of information from the SEC. The issue is whether the government should have
44
informed the reviewing court of the array of conventional investigative techniques
contemporaneously being employed by the SEC to unearth significant evidence of insider
trading, all of which was at the core of the government’s own criminal investigation.
Furthermore, the government’s contention that disclosure was somehow inappropriate
because it did not and could not “control” the SEC investigation is formalism carried to
its extreme. And, of course, it does not address the proper inquiry under the first prong of
the Franks analysis: whether it was “clearly critical” to the reviewing court’s analysis of
the necessity issue to be informed that conventional investigative techniques were then
being employed by the SEC and relied upon by the government, all at the time that the
government was providing boilerplate assurances that alternative investigation techniques
“appear unlikely to succeed.”
b. Materiality
i. Legal Standard
A showing that the government acted recklessly is only half of Rajaratnam’s
burden. Rajaratnam also bears the burden of proving that the misstatements and
omissions were material. Indeed, under Franks, “[t]he ultimate inquiry on a motion to
suppress is…not whether the affidavit contains false allegations or material omissions,
but whether after putting such aside, there remains a residue of independent and lawful
information sufficient” to support the affidavit. Ferguson, 758 F.2d at 848. In making
that determination, “a court should disregard the allegedly false statements and determine
whether the remaining portions of the affidavit would support” the affidavit. United
States v. Trzaska, 111 F.3d 1019, 1027-28 (2d Cir. 1997); see also Canfield, 212 F.3d at
718. And omissions should also be corrected. See Ferguson, 758 F.2d at 848. A court,
45
therefore, “should…delete false or misleading statements and insert the omitted truths
revealed at the suppression hearing.” Ippolito, 774 F.2d at 1486 n.1.
One further issue deserves mention. The Supreme Court has stated that “an
otherwise insufficient affidavit cannot be rehabilitated by testimony concerning
information possessed by the affiant when he sought the warrant but not disclosed to the
issuing magistrate.” Whiteley v. Warden, Wyo. State Penitentiary, 401 U.S. 560, 565 n.8
(1971). Citing that statement, Rajaratnam repeatedly argues that the Court should not
consider many of the government’s arguments as to the sufficiency of a corrected
affidavit because those arguments are “post-hoc rationalizations” that the government did
not make in the initial application. (See, e.g., Rajaratnam Post Hr’g Reply Br. at 13.)
Rajaratnam’s argument that this would give the government “a free second bite at the
application apple” (Rajaratnam Post Hr’g Reply Br. at 5) is appealing, but overly simple.
As an initial matter, Whiteley is not exactly “controlling Supreme Court”
precedent.” (Rajaratnam Post Hr’g Reply Br. at 21.) That case involved a challenge to
the sufficiency of a warrant application, not a Franks proceeding regarding the truth of an
application. See Whiteley, 401 U.S. at 564. Since a Franks proceeding requires deleting
falsehoods and correcting omissions, the entire premise of the Franks approach is that the
court must consider information that did not appear in the original affidavit. In that case,
arguments about what that affidavit would have meant necessarily involve inferences that
were not explicitly made in the original affidavit. Indeed, the Eighth Circuit has held
Whiteley inapplicable to Franks for precisely that reason. See United States v. Finley,
612 F.3d 998, 1003 n.7 (8th Cir. 2010).
46
What is more, Rajaratnam’s argument that “the remaining content is simply the
factually corrected affidavit” and does not “include a supplementary advocacy piece”
(Rajaratnam Post Hr’g Reply Br. at 5 (emphasis in original), elides the fact that, because
the Court does not literally rewrite the affidavit, the exact content of the “remaining
content” is amorphous. Rajaratnam’s distinction comes close to tying the government’s
hands in arguing the materiality point. Cf. United States v. Williams, 737 F.2d 594, 604
(7th Cir. 1984) (reasoning in Franks proceeding related to probable cause that “if the
challenger is permitted to marshal all exculpatory facts, fairness dictates that the
government be allowed to support the affidavit with additional inculpatory information
known to the affiant at the time the affidavit was made”). More importantly, it also is
inconsistent with the purpose of both Title III and the Fourth Amendment, for, as
Rajaratnam himself notes, “[t]he point of the Fourth Amendment…is not that it denies
law enforcement the support of the usual inferences which reasonable men draw from
evidence” but that it “require[s] that those inferences be drawn by a neutral
magistrate….” Johnson v. United States, 333 U.S. 10, 13-14 (1948). Therefore, the
Court will draw its inferences from the totality of facts presented in the government’s
wiretap application as well as those omitted therefrom.
ii. Application
The March 7, 2008 affidavit, as corrected, would have informed the issuing judge
that Rajaratnam had been under investigation for insider trading since 1998 when the
U.S. Attorney’s office in San Francisco began investigating Roomy Khan; that Khan
cooperated in the investigation of Rajaratnam as part of a plea agreement; that the SEC
began investigating Rajaratnam and Galleon in 2002; that the SEC had interviewed
47
eighteen Galleon employees and deposed Rajaratnam and others under oath; that the SEC
had issued over two hundred subpoenas and obtained millions of pages of documents,
including telephone records, trading records, e-mails, and IMs; that all the evidence was
shared with the government through regular meetings during the course of the
investigations; and that the evidence thus gathered enabled both the SEC and the
government to develop substantial circumstantial evidence of insider trading by
Rajaratnam and numerous associates in the securities of several companies. Finally, the
evidence gathered led directly to the FBI’s interviews of Roomy Khan during which she
“flipped” and provided the government with direct evidence of insider trading by
Rajaratnam.
Given the advances made in both investigations through the application of
conventional investigative techniques, it is surely incorrect to say that these investigative
procedures had “failed” in an abstract sense. But Rajaratnam’s characterization that “the
government’s conventional investigation had yielded a veritable mountain of evidence”
oversimplifies the case. (Rajaratnam Post Hr’g Reply Br. at 19.) On the other hand, the
government repeatedly understates what it found in that “mountain” of evidence, careful
analysis of which, after all, enabled the criminal authorities and the SEC to identify
multiple sources of inside information and flip Khan, thereby developing additional
leads. The government’s suggestion that these were only ‘weak or non-existent’
circumstantial cases” (Gov’t Post Hr’g Opp’n at 38) cannot be squared with the minute-
by-minute analyses of IMs, toll records, and trading records prepared by the SEC and
spoon-fed to the government.
48
However, “failure” in the Title III sense is not an abstract proposition. “Just
because the government had achieved some success in collecting evidence through [a
confidential source] does not demonstrate the success of ‘normal investigative
procedures’ under Title III.” Gambino, 734 F. Supp. at 1103. As the government rightly
points out, if that were so, a wiretap would never be approved because a showing of
probable cause would negate necessity and a showing of necessity would negate probable
cause. Cf. United States v. McLee, 436 F.3d 751, 763 (7th Cir. 2006) (“[T]he fact that the
government may have been able to indict him in the absence of evidence obtained
through the use of a wiretap does not preclude a finding of necessity.”).
Many of the same documents that were used to compile the SEC chronologies
strongly suggested that Rajaratnam had been careful to exchange nearly all of his inside
information by telephone. (See Franks Tr. 398-408, 702; Gov’t Exs. 17, 24, 32.)
“[W]iretapping is particularly appropriate when the telephone is routinely relied on to
conduct the criminal enterprise under investigation.” United States v. Steinberg, 525 F.2d
1126, 1130 (2d Cir. 1975); see also Lilla, 699 F.2d at 105 n. 6 (“If the crimes in question
were planned and consummated only by means of telephone…the argument that
wiretapping was the only option might seem more persuasive.”). Rajaratnam argues that
“the government cannot satisfy the statutory requirement of necessity simply by defining
the goals of its investigation so expansively that no investigative technique, including
wire surveillance, could ever satisfy them.” (Rajaratnam Post Hr’g Br. at 45.) True, but
the fact that the SEC’s investigation had identified certain sources did not preclude a
showing that a wiretap was necessary to confirm those sources and fully uncover
49
Rajaratnam’s network of sources. 24 See United States v. Hinton, 543 F.2d 1002, 1011
(2d Cir. 1976) (rejecting suppression where “even though state or federal officers may
have garnered sufficient information without the use of wiretaps to support an
indictment….there was every reason to believe that additional co-conspirators were
involved who could not be successfully investigated without wiretapping”); United States
v. Blount, 30 F. Supp. 2d 308, 312 (D. Conn. 1997) (rejecting suppression where
investigation “reflected the need for additional information to tie conclusively into the
conspiracy not only those targeted by and named in the application, but others then
unidentified” because “[t]hose added purposes buttressed the government’s claim that
though successful to a degree, the methods used had not entirely succeeded”).25
Rajaratnam responds that if the government believed it needed more evidence
“there was absolutely nothing to prevent the USAO, FBI, and SEC from continuing to
use these same techniques to develop additional evidence going forward based on the
leads already developed.” (Rajaratnam Post Hr’g Reply Br. at 15.) Not so says the
24
A corrected affidavit would also have disclosed that the criminal authorities had made
use of grand jury subpoenas to obtain documents from third parties. However,
Rajaratnam introduced no evidence that any of these records produced anything of value.
The original affidavit also represented that the government had tried to conduct physical
surveillance but had failed because Rajaratnam and his confederates worked in large
office buildings and traveled frequently. (See Kang Ex. 1 at 39-42.) Other than the
government’s slapdash efforts to perform surveillance and thereby touch all the bases in
its wiretap application, nothing adduced at the Franks hearing cast doubt on the accuracy
of the representation itself.
25
Cf. United States v. West, 589 F.3d 936, 939 (8th Cir. 2009) (“If law enforcement
officers are able to establish that conventional investigatory techniques have not been
successful in exposing the full extent of the conspiracy and the identity of each
coconspirator, the necessity requirement is satisfied.”); United States v. McLee, 436 F.3d
751, 763 (7th Cir. 2006) (“The government’s demonstrated need for a wiretap as a means
of identifying all coconspirators and the roles they occupied in the structure of the
conspiracy is sufficient for a finding of ‘necessity’ under the statute.”).
50
government. Despite the development of circumstantial evidence that led to flipping
Roomy Khan in early 2008, the criminal authorities say they had “hit a bit of a wall” by
March 2008. (Franks Tr. at 814.) Not surprisingly, both parties’ positions are
overstated. It is likely true, as Rajaratnam contends, that the government could have
developed more evidence by conventional means and proceeded to indictment of at least
some alleged co-conspirators. Indeed, the government asserts that this is the very first
time that wiretaps have been used in an insider trading investigation. (Michaelson Ex. 2
at 4.) It is clear that conventional techniques have at least proven adequate in the past.
But whether they were or would be adequate in the present cases requires a more
particular inquiry.
Could or should the government have done more with conventional techniques to
test whether a wiretap was “necessary”? It is hard to make that argument with regard to
document subpoenas, search warrants, and other forms of documentary investigation.
Over four million documents from targets and third parties had already been gathered.
Analysis of the documentary evidence was fairly sophisticated and while this revealed
much circumstantial evidence of insider trading it also confirmed what one would expect:
insider trading is typically conducted verbally. Thus it seems reasonably unlikely that
additional documents would have produced qualitatively different evidence.
Rajaratnam argues that the criminal authorities “had not finished doing their own
homework by actually completing their review of the documentary evidence that [the
SEC] had obtained.” (Rajaratnam Post Hr’g Reply Br. at 15.) Given that Rajaratnam so
strenuously argues that the SEC and the criminal authorities were effectively one and the
same, his argument that the USAO and FBI needed to rework the analysis provided by
51
the SEC is unconvincing. Particularly where the documents suggest that defendants were
careful not leave a paper trail, there is little reason to believe that Judge Lynch would
have required the criminal authorities to repeat the SEC’s effort. See Steinberg, 525 F.2d
at 1131. While it is theoretically possible that the criminal authorities could have found a
needle in the haystack, that search hardly would have been “cost-effective”, Ippolito, 774
F.2d at 1486, and the government is not “required to exhaust all conceivable investigative
techniques before resorting to electronic surveillance.” Concepcion, 579 F.3d at 218.
Moreover, at least one court in this Circuit has rejected a Franks challenge premised in
part on the ground that criminal authorities relied on other agencies’ reports about their
own files. See United States v. Pappas, 298 F. Supp. 2d 250, 265 (D. Conn. 2004)
(rejecting Franks challenge where FBI agent “fail[ed] to disclose in his affidavit the fact
that he did not physically review the Arizona DEA’s and FBI’s files” in part because “the
inclusion of this information in the affidavit would not have precluded a finding that the
Government satisfied the necessity requirement”).
The criminal authorities also had other options. They could have introduced
undercover agents, but Rajaratnam points to no reason why Judge Lynch should have
doubted “the difficulty of introducing a[n undercover agent] into this close-knit scheme.”
(Kang Ex.1 at 47.) Whether additional witness interviews were “reasonably unlikely to
succeed” presents a much closer question. As an initial matter, a properly drafted
affidavit would have (and should have) disclosed that the SEC interviewed numerous
Galleon employees, including Rajaratnam himself, and had identified at least twelve
other potential interviewees based on trading records, phone records, and IMs. However,
none of the people the SEC interviewed admitted any insider trading and the most useful
52
piece of information they provided was that Rajaratnam was friends with Rajiv Goel. In
this respect, at least, it appears that the SEC, and by inference the criminal authorities,
had “hit a wall” of sorts. Where an investigation develops strong circumstantial evidence
of wrongdoing but then is confronted by “stonewalling” by witnesses, the case for
wiretapping is surely strengthened.
The FBI, however, seemed to have more success than the SEC. When the FBI
interviewed Roomy Khan, she agreed to cooperate, identified sources of information, and
recorded phone calls with Rajaratnam. (Michaelson Exs. 109, 110; Goldberg Ex. 17;
Franks Tr. at 753.) And none of this compromised the covert nature of the criminal
investigation. It is therefore natural to ask why the FBI could not have tried to flip any of
the twelve other potential interviewees that the SEC had identified, including Rajiv Goel.
And if the government is correct that witnesses take a criminal investigation more
seriously than one conducted by the SEC (Franks Tr. at 639-40, 654-55, 799-801), it may
be inferred that attempting to interview or seek the cooperation of other witnesses was a
conventional technique that would, in fact, be likely to succeed.
Two reasons emerged from the hearing, however, as to why it made sense to
approach Khan but not others. First, it was suggested that Khan “was the only one that
[the criminal authorities] had what [they] felt to be convincing enough evidence that
made an approach a reasonable risk to take.” (Franks Tr. at 813.) Khan’s prior
conviction coupled with damaging IMs, call logs and trading records made this a fair
judgment. Second, and indisputably, Khan’s agreement to cooperate against Rajaratnam
in 2002 made her “a good candidate for cooperation” in the present case. (Franks Tr. at
53
812-13.) So there was a good reason to start with Khan, and given her unique posture,
her cooperation does not necessarily imply that other targets could also be flipped.
Rajaratnam dismisses the risks that a failed approach to other targets could
compromise the criminal investigation since the existence of the SEC investigation would
have likely been known by other targets. But the Court sees this as a closer question of
judgment. The Court is aware that “[d]istrict courts must remain vigilant in ensuring
that…reasoning[] based more on efficiency and simplicity than necessity[] will not
justify a wiretap.” Concepcion, 579 F.3d at 220. However, Title III only requires a
showing that traditional techniques are “reasonably unlikely to succeed”; “a reasoned
explanation, grounded in the facts of the case, and which squares with common sense, is
all that is required . . . .” Scala, 388 F. Supp. 2d at 404 (internal quotation marks
omitted); see also Concepcion, 579 F.3d at 218; Fury, 554 F.2d at 530. Rajaratnam, who
bears the burden of proof, Franks, 438 U.S. at 155-56, has not introduced any evidence
other than the success of the Khan approach that suggests that attempting to flip other
witnesses was a risk-free strategy that rendered a wiretap unnecessary. And the
government’s contention that Roomy Khan was a special case is not unreasonable. In
that circumstance, suppression based on speculation that alternative strategies might have
been effective seems inappropriate. See United States v. Shipp, 578 F. Supp. 980, 989
(S.D.N.Y. 1984) (Weinfeld, J) (“Monday morning quarterbacking as to what
investigative techniques the agents should have employed in addition to what they did
employ is utterly unrealistic, if not naive.”), aff’d sub nom. United States v. Wilkinson,
754 F.2d 1427 (2d Cir. 1985).
54
Finally, Rajaratnam argues that “[t]he government has conspicuously failed to cite
any case, from any jurisdiction, ever, that found a wiretap to be necessary under the
circumstances that a corrected affidavit would disclose in this case.” (Rajaratnam Post
Hr’g Reply Br. at 16.) As an initial matter, that argument seems to saddle the
government with Rajaratnam’s own burden of proof. See Franks, 438 U.S. at 155-56.
And Rajaratnam himself fails to cite any case where a court found a wiretap unnecessary
in the circumstances that a corrected affidavit would have disclosed here.26 Rajaratnam
cites United States v. Aileman, 986 F. Supp. 1228 (N.D. Cal. 1997), but suppression in
that case was based in part on the fact that the criminal authorities “made little
meaningful effort, before [they] applied for the wiretap, to draw on the resources or the
expertise of the Customs Service, the IRS, the INS, the FBI, or the Canadian office of the
DEA” or a related investigation conducted by Canadian authorities. Id. at 1301, 1314.
The entire premise of Rajaratnam’s Franks challenge is that the criminal authorities here
did exactly the opposite with respect to the SEC.

26
The dearth of decisions ordering suppression is hardly surprising, since, with the
exception of United States v. Lilla, 699 F.2d 99 (2d Cir. 1983), and United States v.
Concepcion, No. 07-CR-1095, 2008 WL 2663028 (S.D.N.Y. July 1, 2008), rev’d 579
F.3d 214 (2d Cir. 2009), the Court is not aware of any case in this Circuit where a court
found a wiretap unnecessary in any circumstance. Concepcion was reversed by the
Second Circuit, see 579 F.3d 214, and Lilla is distinguishable because, unlike the
corrected affidavit here, which would have described an extensive investigation to
determine the identity of Rajaratnam’s sources, the affidavit in that case “merely asserted
that ‘no other investigative method exists to determine the identity’ of individuals who
might have been involved” with the drug dealer from whom the officers had already
purchased drugs and, to all appearances, could easily approach again. See id. at 104.
Rajaratnam argues that “[t]he fact that the Second Circuit considered Concepcion to be
‘exceptionally close,’ even though none of these conventional techniques were available
to the criminal investigators in that case, simply shows how far short of the statutory
demonstration of necessity a corrected affidavit would fall in this case.” (Rajaratnam
Post Hr’g Reply Br. at 16 (emphasis in original).) That argument is misplaced because
the allegedly available techniques in that case—confidential informants and physical
surveillance—were likely unavailable here.
55
Instead, United States v. Zolp, 659 F. Supp. 692, (D.N.J. 1987) seems the most
apposite decision. In that case, which involved a securities fraud scheme regarding a
company called Laser Arms, the government’s wiretap applications claimed that:
participants in securities fraud schemes conduct much of the unlawful side of their
business over the telephone; such participants are aware the paper documentation
involved in their business is subject to being subpoenaed and they thus often
prepare such documentation so as to conceal wrongdoing; the confidential
informant’s knowledge of, and anticipated testimony on, the conspiracy would be
insufficient to bring about convictions of all participants in the conspiracy;
surveillance and searches of the premises would be insufficient to reveal the full
extent of the conspiracy; and, because many of the suspects were aware of the
pending SEC investigation into Laser Arms, they were particularly cautious about
infiltration and “normal” governmental surveillance.
Id. at 710. Like Rajaratnam here, Zolp argued (a) that the “affidavits failed to set forth
details of [a] SEC civil proceeding against Laser Arms and thus failed to advise the judge
to whom the initial wiretap application was directed that normal investigative
surveillance techniques had already proven effective in the investigation” and (b) that
“the judges to whom the applications were made might not have authorized the wiretaps
had they been made aware of the success which ‘normal’ investigative techniques had
already achieved.” Id. But the court found this argument “unpersuasive” where “the
judges to whom the wiretap applications were made were aware that non-wiretap
techniques had produced information against Laser Arms at least sufficient to suspend
trading in Laser Arms stock” but “the affidavit [wa]s explicit that ‘normal’ techniques
were unlikely ‘to determine the complete scope of the RICO conspiracy and related
predicate offenses in which [the targets] [we]re involved, and to identify the other
participants and the roles played by such other participants.’” Id. at 710-11. Just so, with
the affidavit, as corrected, here.
56
C. Chiesi’s Claims
Chiesi also argues that the government failed to demonstrate necessity in its initial
August 13, 2008 wiretap application. She makes two arguments. First, she accuses the
government of misstating information in the August 13, 2008 Kang Affidavit. (Chiesi
Br. at 10, 16 n.9 & n.10.) Second, she says that the government did virtually no
investigation of her before requesting wiretap authorization—in other words, that there
were not minimally adequate facts to justify Judge Sullivan’s order authorizing wiretaps
of her phones. (Chiesi Br. at 10-11, 14-20.) Both arguments are unavailing.27
1. False or Misleading Statements or Omissions in the August 13 Kang

Affidavit
Chiesi argues that the August 13, 2008 Kang Affidavit made various false
statements. Unlike Rajaratnam, Chiesi does not request a Franks hearing to probe the
government’s conduct in preparing its first application, on August 13, 2008, for
authorization to wiretap her phones. Instead, she appears to argue that suppression is
warranted based on the allegations made in her brief. However, there is “a presumption
of validity with respect to the affidavit supporting the search warrant”, Franks, 438 U.S.
at 171, and Chiesi’s allegations do not come close to showing that the affidavit was false
27
Chiesi also incorporates all of Rajaratnam’s arguments regarding necessity, “because
those allegations are nearly identical to and form the basis of the necessity allegations
with respect to the necessity of the wiretaps over the Chiesi Phones.” (Chiesi Br. at 15
n.7.) Were that true, Chiesi would have the same right to a Franks hearing that the Court
granted Rajaratnam. It is not true, however, because there is no indication that the SEC
investigation extended to Chiesi and her sources. The omission of that investigation is
the most glaring problem that Rajaratnam identifies in the government’s March 7, 2008
affidavit. But it has little relevance to Chiesi.
57
or misleading or that the government drafted it with “reckless disregard”, never mind that
its “remaining content is insufficient.” Id. at 156.28
Chiesi points to the affidavit’s comment that wiretaps would help to reveal,
among other things, the “identities of the TARGET SUBJECTS, their accomplices, aiders
and abettors, co-conspirators and participants in their illegal activities.” (Gov’t Opp’n to
Chiesi Ex. 1-C at 8.) According to Chiesi, this was false because the government already
knew that Moffat, De Ruiz, and Taylor were Chiesi’s sources. (Chiesi Br. at 15 n.8.)
Even granting this, all the government knew was that Chiesi had at least three sources—
not that she had only three.
Chiesi also cites the affidavit’s claims that various investigative techniques would
not work (Gov’t Opp’n to Chiesi Ex. 1-C at 34-41), claims she calls “clearly
unsupportable,” “self-contradictory,” and “untrue.” (Chiesi Br. at 16 n.9 & n.10, 17.)
Chiesi, for example, believes that it was misleading for the government to say that
requesting more detailed records from clearing firms about the trading activity of Chiesi’s
hedge fund, New Castle, could jeopardize the investigation. (Gov’t Opp’n to Chiesi Ex.
1-C at 37.) She argues that the government had reviewed Galleon records during the
previous few years, and it could have done the same for New Castle records. (Chiesi Br.
at 16 n.10.) But Chiesi offers no evidence that the SEC was investigating Chiesi at the
time, or that she or New Castle had any other reason to suspect they were targets of a
federal criminal investigation. The government could reasonably have worried that
28
Franks itself states that this standard applies “at that hearing,” Franks v. Delaware, 438
U.S. 154, 156 (1978), but given that the Franks standard is designed to ensure that a
“challenger’s attack must be more than conclusory,” id. at 171, it would make no sense
that a defendant who chose to challenge an affidavit without a hearing could win
suppression by satisfying a lower standard.
58
requesting records would have tipped off Chiesi’s fund. In the same way, the
government could reasonably have worried that witness interviews could compromise the
investigation.
Finally, Chiesi accuses the government’s affidavit of internal inconsistencies in
describing why witness interviews and confidential informants would be inadequate
substitutes for wiretapping. In one place, the affidavit claimed that witness interviews of
Chiesi or other target subjects would be too risky and could jeopardize the investigation.
(Gov’t Opp’n to Chiesi Ex. 1-C at 37–38.) In another, it mentioned two confidential
informants and noted that it had approached three other individuals, each of whom “has
provided information to the government in connection with the investigation,” but none
of whom “communicates directly with CHIESI or any other TARGET SUBJECT.” (Id.
at 39–40.) There is no internal inconsistency here. The affidavit’s section on witness
interviews related only to interviewing Chiesi and other target subjects; the section on
confidential informants did not. (See id. at 40.)
For all these reasons the Court finds no evidence that the government knowingly
or recklessly misled Judge Sullivan. The Court therefore finds no reason to disregard the
“presumption of validity with respect to the affidavit supporting the search warrant.”
Franks, 438 U.S. at 171.
2. Minimally Adequate Facts in the Affidavit to Justify Wiretap Authorization
Chiesi nevertheless attacks the sufficiency vel non of the August 13, 2008 Kang
Affidavit’s necessity section on the ground that it too closely resembled the necessity
section in the March 7, 2008 Kang Affidavit in support of wiretap authorization for
Rajaratnam’s phone. The Second Circuit has held that “generalized and conclusory
59
statements that other investigative techniques would prove unsuccessful” are inadequate
to satisfy the necessity requirement. Lilla, 699 F.2d at 104. True enough, but Judge
Sullivan has made a considered determination that the August 13, 2008 Kang Affidavit
adequately supported a finding that wiretaps were necessary to the government’s
investigation of Chiesi. And, absent any misstatements, that determination is entitled to
“considerable deference,” Concepcion, 579 F.3d at 217 & n.1, with the reviewing court’s
task limited to ensuring that the application was “minimally adequate to support the
determination that was made,” Miller, 116 F.3d at 663.
The August 13, 2008 Kang Affidavit was particularized enough to Chiesi to pass
muster under this standard of review. It described, for example, law enforcement
officers’ attempts to surveil Chiesi. (Gov’t Opp’n to Chiesi Ex. 1-C at 34-35.) The
government also explained why physical surveillance of Chiesi’s residence was not likely
to be successful: (1) it was not yet sure where or when Chiesi might be meeting with
sources or co-conspirators; and (2) physical surveillance was “expected to be of limited
utility,” because the government anticipated that the primary means by which Chiesi and
other target subjects were engaging in the crime was via telephone. (See Gov’t Opp’n to
Chiesi Ex. 1-C at 35–36.) The fact that the Rajaratnam warrant affidavit closely parallels
the Chiesi one is similarly unproblematic. Where boilerplate accurately depicts the facts
on the ground, Title III requirements are satisfied. See United States v. Herrera, No. 02-
CR-0477, 2002 WL 31133029, at *2 (S.D.N.Y. Sept. 23, 2002) (Kaplan, J.) (upholding
use of “boilerplate” language, noting that it “should come as no surprise that the facts
supporting the conclusion that the alternative methods would be unavailing often are
similar from one narcotics operation to another”).
60
Chiesi also argues that the August 13, 2008 Kang Affidavit is insufficient on its
face because the government failed to first try a number of conventional techniques, such
as reviewing New Castle’s trading records, approaching potential witnesses, trying to flip
targets, trying to identify confidential informants, inserting an undercover agent, and
applying for a conventional search warrant. (Chiesi Br. 16–17.)29 But “[a]gents are not
required to resort to measures that will clearly be unproductive.” Terry, 702 F.2d at 310.
Even assuming that the use of alternative techniques would have achieved some measure
of success, the government was entitled to use a wiretap if necessary to achieve other
investigatory objectives.30 See Gambino, 734 F. Supp. at 1103; United States v.
Cartagena, 593 F.3d 104, 110 (1st Cir. 2010) (“Even if traditional investigative
procedures produce some results, the partial success of the investigation does not mean
that there is nothing more to be done.”) (emphasis in original) (internal quotation marks
and alterations omitted). In this case, the government provided a “reasoned explanation”
that “square[d] with common sense,” Scala, 388 F. Supp. 2d at 404, as to why only a
wiretap would achieve all of its investigatory goals. That “is all that is required.” Shipp,
578 F. Supp. at 989.
29
Chiesi thinks that too little time passed between the government’s finding out about her
and its request for wiretap authorization—two months—for it to have conducted a
meaningful investigation. But “[t]here is no rule on the amount of time investigators
must try and fail, using other methods, before turning to a wiretap application.” United
States v. Cartagena, 593 F.3d 104, 110 (1st Cir. 2010) (brackets in original) (internal
quotation marks omitted).
30
Chiesi also contends that other insider trading investigations have succeeded without
using Title III, and this one could have too. But on that logic Title III would never justify
wiretapping for types of investigations that sometimes succeed without wiretaps. That is
not the law.
61
In sum, the government fulfilled its statutory responsibility to “inform the
authorizing judicial officer of the nature and progress of the investigation and of the
difficulties inherent in the use of normal law enforcement methods.” Torres, 901 F.2d at
231. At the least, minimally adequate facts existed to justify Judge Sullivan’s decision
authorizing the wiretaps of Chiesi’s phones.
IV. Minimization
Rajaratnam and Chiesi both challenge a number of intercepts because they say the
government failed to minimize properly. Title III requires that eavesdropping “be
conducted in such a way as to minimize the interception of communications not
otherwise subject to interception under this chapter.” 18 U.S.C. § 2518(5). Every
wiretap order must contain a provision mandating minimization in accordance with Title
III. See id. Here, the judges who authorized wiretapping of both defendants’ telephones
included such a provision in their orders of authorization. Therefore the question is
“whether the [g]overnment obeyed the provision in carrying out the wiretaps.” United
States v. Salas, 07-CR-0557, 2008 WL 4840872, at *6 (S.D.N.Y. Nov. 5, 2008) (Koeltl,
J.).
The minimization requirement “does not forbid the interception of all nonrelevant
conversations, but rather instructs the agents to conduct the surveillance in such a manner
as to ‘minimize’ the interception of such conversations.” Scott v. United States, 436 U.S.
128, 140 (1978). It “only requires a reasonable effort to minimize the interception of
irrelevant calls.” United States v. McGuinness, 764 F. Supp. 888, 900 (S.D.N.Y. 1991)
(citing United States v. Manfredi, 488 F.2d 588 (2d Cir. 1973), cert. denied, 417 U.S. 936
(1974)).
62
Compliance is measured by the reasonableness of the monitoring agents under the
circumstances. See Scott, 436 U.S. at 139; Salas, 2008 WL 4840872, at *6.
Reasonableness is gauged “in the context of the entire wiretap, as opposed to a chat-by-
chat analysis.” McGuinness, 764 F. Supp. at 901. “[T]he mere fact that every
conversation is monitored does not necessarily render the surveillance violative of the
minimization requirement of the statute . . . . [N]o electronic surveillance can be so
conducted that innocent conversation can be totally eliminated.” United States v. Bynum,
485 F.2d 490, 500 (2d Cir. 1973), vacated on other grounds, 417 U.S. 903 (1974). Even
“where the percentage of nonpertinent calls is relatively high,” their interception may still
be reasonable in some cases. Scott, 436 U.S. at 140. And “when the investigation is
focusing on what is thought to be a widespread conspiracy more extensive surveillance
may be justified in an attempt to determine the precise scope of the enterprise.” Id.
Moreover, the “minimization requirement does not extend to calls lasting two minutes or
less.” Salas, 2008 WL 4840872, at *6 (citing Bynum, 485 F.2d at 500); see United States
v. Capra, 501 F.2d 267, 275–76 (2d Cir. 1974).
The government has the burden to show that it properly minimized intercepts.
See United States v. Rizzo, 491 F.2d 215, 217 n.7 (2d Cir. 1974). Once a prima facie
showing is made, the burden shifts to the defendant to show that, despite a good faith
compliance with the minimization requirements, “a substantial number of non-pertinent
conversations have been intercepted unreasonably.” United States v. Menendez, No. 04-
219, 2005 WL 1384027, at *3 (S.D.N.Y. June 8, 2005) (citing cases); United States v.
Ianniello, 621 F. Supp. 1455, 1470 (S.D.N.Y. 1985) (Weinfeld, J.).
63
A. Rajaratnam’s Claims
In support of his claim that the government failed to comply with the
minimization requirement, Rajaratnam cites 150 calls that were non-pertinent but were
still recorded. (See Rajaratnam Br. at 74.) Of the 150 non-pertinent conversations
mentioned, Rajaratnam only actually summarizes 69. (See Rajaratnam Br. Ex. E.1.) By
the Court’s count, 54 of those 69 calls lasted less than two minutes. (See id.)
Accordingly, they were not subject to the minimization requirement. See Salas, 2008
WL 4840872, at *6. The remaining 15 calls represent .68 percent of the total calls
(2,200) the FBI intercepted. The government says that even these calls were minimized
frequently. (See Gov’t Opp’n to Rajaratnam at 69.) In these circumstances the
government’s conduct in monitoring the Rajaratnam wiretap was objectively reasonable.
See Salas, 2008 WL 4840872, at *7 (failing to minimize 11 calls out of 1,541 “was not
objectively unreasonable”); Bynum, 485 F.2d at 500 (“[N]o electronic surveillance can be
so conducted that innocent conversation can be totally eliminated.”).
In addition, the government has represented to the Court that it took “extensive
measures” to “increase the likelihood of its compliance.” (Gov’t Opp’n to Rajaratnam at
69.) In particular, it maintained monitoring logs; submitted progress reports to the
issuing court; briefed monitoring officers on the minimization requirements; and posted
written memos at the wire facilities explaining the standards for minimization and the
procedures to be followed for compliance. (Id.) As other courts have held, such
measures “are helpful in establishing compliance with the minimization requirement.”
Menendez, 2005 WL 1384027, at *3-4; see United States v. Pichardo, No. 97-CR-02323,
1999 WL 649020, at *6 (S.D.N.Y. Aug. 25, 1999) (internal citations omitted).
64
Considering the “nature and scope of the criminal enterprise under investigation,”
Pichardo, 1999 WL 649020, at *6, the small number of interceptions to which
Rajaratnam raises any objection at all, and the government’s precautions to ensure
compliance with the minimization requirement, the Court finds that the government acted
objectively reasonably under the circumstances. No suppression is required.
B. Chiesi’s Claims
Chiesi claims that 155 calls lasting more than two minutes, or 13.9% of the 1,116
intercepted calls lasting longer than two minutes, pertained solely to personal issues. She
contends that the government made virtually no effort to minimize these recordings.
(Chiesi Br. at 32.) The Court disagrees. In reality, the government spot-checked
frequently and minimized more than 50 percent of the duration of these 155 calls. (See
Gov’t Opp’n to Chiesi Ex. 9.)
Chiesi, moreover, does not dispute that 29 of the challenged calls “involved a
communication between Chiesi and an individual with whom Chiesi frequently engaged
in pertinent, criminal conversations.” (Gov’t Opp’n to Chiesi at 38.) Some of the 29
calls themselves involved pertinent information. Chiesi calls this “incorrect” because the
calls “contained significant personal content” as well. (Chiesi Reply Br. at 18.) That the
calls contained both personal and pertinent content, however, does not make them non-
pertinent altogether. Nor does it mean that the calls should have been terminated for
veering into the speakers’ personal lives. As Judge Koeltl noted in Salas, “[s]ome
allowance must . . . be made for the fact that conversations can shift topics, and it would
be unreasonable for surveilling agents to minimize each call that did not begin as
incriminating.” Salas, 2008 WL 4840872, at *7; see Ianniello, 621 F. Supp. at 1471 (“It
65
is common, of course, for conversations to treat more than one subject, and entirely
possible for such dialogues to be comprised of discussion of innocent matters,
interspersed with topics of a criminal nature. The statutory requirement of minimization
does not mean that only communications exclusively devoted to criminal subjects may be
intercepted.”). Even so, the 29 calls were minimized; the government recorded 72
percent of the total duration of those calls.
The remaining 126 calls were spot-checked and minimized; ultimately the
government monitored and recorded about 40 percent of their duration. (Gov’t Opp’n to
Chiesi at 39.) Only seven of these calls were not minimized at all. (See id. at 40; Ex. 9,
Calls M-25, M-32, M-45, M-100, M-119, M-135, M-140.) In two of them, Chiesi
discussed AMD, a company about which inside information was allegedly exchanged.
(Gov’t Opp’n to Chiesi Ex. 9, Calls M-45, M-140.) Three other calls barely passed the
two-minute mark. (Id., Calls M-25, M-32, M-119.)
Beyond this, the government has represented to the Court that it took extensive
measures to comply with the minimization requirement. As it did for the Rajaratnam
wiretap, the government maintained monitoring logs; submitted progress reports to the
issuing court; briefed monitoring officers on the minimization requirements; and posted
memoranda at the wire facilities explaining the standards for minimization and the
procedures to be followed for compliance. (Gov’t Opp’n to Chiesi at 40.) These
measures provide more evidence of the government’s substantial compliance with the
minimization requirement. See Pichardo, 1999 WL 649020, at *6.
The government’s efforts here were at least as good as those upheld in Salas.
There, the government had intercepted 50 calls lasting more than two minutes, 11 of
66
which were non-pertinent calls that were not minimized at all. 2008 WL 4840872, at *7.
Here, the government intercepted 1,116 calls lasting more than two minutes, of which
Chiesi challenges 155. Even assuming that all of Chiesi’s contentions are right, the Court
finds the government’s conduct objectively reasonable under the circumstances.
67
CONCLUSION
For the foregoing reasons, Rajaratnam's and Chiesi's motions [86, 90J to suppress
are denied. 31
SO ORDERED.
Dated: New York, New York

November ~, 2010
Richard J. Holwell
United States District Judge
31 By letter dated May 12, 2010, Chiesi also moved to suppress evidence that the
government had obtained pursuant to wiretaps of phones used by C.B. Lee and Ali Far.
That motion is denied. First, as Chiesi implicitly acknowledges, evidence obtained from
the Rajaratnam and Chiesi wiretaps supports probable cause for wiretapping Lee's and
Far's phones. (See May 12,2010 Letter at 2.) Second, Chiesi has not established that the
government's October 14,2008, application to wiretap Lee's and Far's phones was
deficient in describing why wiretaps were necessary. Chiesi says that the government
only attempted physical surveillance of Lee once, and that its October 14 affidavit closely
resembled the August 13, 2008 affidavit. This argument fails for exactly the reasons
articulated above in the section rejecting Chiesi's motion to suppress based on the
government's failure to establish necessity.
68

Decision Allowing Wiretaps in Galleon Group Case

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Case 1:09-cr-01184-RJH Document 148 Filed 11/24/10 Page 1 of 68

UNITED STATES DISTRICT COURT

UNITED STATES OF AMERICA,

-against- 09 Cr. 1184 (RJH)

Richard J. Holwell, District Judge:

Defendants Raj Rajaratnam (“Rajaratnam”) and Danielle Chiesi (“Chiesi”) have

failed to establish the inadequacy of conventional investigative procedures and, therefore,

does not specifically authorize wiretaps to investigate insider trading alone.

wiretap application contained material misstatements or omissions, or was otherwise

remainder of the affidavit demonstrated ample reason to find probable cause.

of Rajaratnam upon which the government’s criminal investigation substantially relied.

wiretap application and (2) that investigation employed entirely conventional

Finally, the government complied with its statutory responsibility to minimize

the criminal investigation resulting in the indictment of Rajaratnam in 2007.1 The

to wiretap Rajaratnam’s and Chiesi’s phones.

The government first sought authorization to wiretap Rajaratnam’s cell phone in

an application submitted to Judge Lynch on March 7, 2008. (Gov’t Opp’n to Rajaratnam

necessary in that normal investigative techniques were or would be unlikely to succeed in

intercepting communications over Rajaratnam’s phone on or about March 10.

Thereafter, the government applied for authorization to continue intercepting

3-D, 4-I, 5-D, 6-D, 7-D, 8-D.)

was returned on February 9, 2010 (Gov’t Opp’n to Rajaratnam Ex. 12).

through the wiretaps on their phones. In connection therewith, Rajaratnam requested a

I. Use of Title III to Investigate Insider Trading

investigation for an authorized offense. See id.; 18 U.S.C. § 2517(5). Specifically,

Section 2517(5) provides that:

[w]hen an investigative or law enforcement officer, while engaged in intercepting

communication was in fact incidentally intercepted during the course of a lawfully

States v. Levine, 690 F. Supp. 1165, 1171 (E.D.N.Y. 1988).

use of wiretaps in connection with the government’s investigation.

Defendants contend that the government’s primary objective in using wiretaps

on insider trading as opposed to wire fraud. But defendants’ argument unrealistically

wire fraud a “fig leaf” (Rajaratnam Reply Br. at 40).

Of course, there is no denying that, in intercepting communications that would

the interception of communications relating to money laundering); United States v.

minor was incidentally intercepted during the lawfully authorized interception of

communications relating to corruption and racketeering activities). Here, by contrast, the

authorization might rapidly degenerate into . . . the electronic equivalent of a general

“inadvertent” or “incidental”). In In re Grand Jury Subpoena, the government expected

the interception of evidence of securities fraud was a by-product of the interception of

evidence of wire fraud.

According to the defendants, allowing the government to use wiretapping in any

permitted to make in its stead.8

Assuming that the government’s wiretap applications established both probable

government can introduce evidence of insider trading it discovered on the wiretaps as

long as the government applied to do so “as soon as practicable.” 18 U.S.C. § 2517(5).

can introduce wiretap evidence under Section 2517(5).

fraud in 2000, computer fraud in 2001—without adding securities fraud. (See

II. Probable Cause

v. Fury, 554 F.2d 522, 530 (2d Cir. 1977)).

“[P]robable cause is a fluid concept—turning on the assessment of probabilities in

than a ‘mere suspicion’ of wrongdoing, its focus is on ‘probabilities,’ not ‘hard

court in reviewing the issuance of a wiretap order . . . is not to make a de novo

government’s affidavit misstated or omitted material information about probable cause.

have an opportunity to assess the affidavit without the inaccuracies.”).

Where a defendant makes a preliminary showing that the government’s affidavit

misstated or omitted material information, Franks instructs a district court to hold a

hearing to determine if the misstatements or omissions were made intentionally or with

falsehoods, what remains of the warrant affidavit is insufficient to support a finding of

there remains a residue of independent and lawful information sufficient to support

Rajaratnam contends that the government’s application and supporting affidavit

(2) mischaracterized other evidence referenced in the affidavits. As noted, he sought a

Court now sets forth its reasoning.

297, 300–01 (4th Cir. 1990) (formatting normalized)).