The conviction of hedge fund manager Raj Rajaratnam is likely to spur the use of wire taps by prosecutors aiming to halt abusive trading, lawyers say.
Former prosecutors and defense lawyers say the criminal trial showed the power of wire taps, court-approved covert listening devices, which helped bolster the government's $63m insider trading case against the founder of Galleon Group. The government's ability to use the defendant's own voice against him before a jury made it difficult for lawyers to construct a defense for his trades.
"You can't just say 'a conversation was taken out of context' when you have a recorded phone call," says Philip Hilder, a former federal prosecutor. "It is one of the most powerful tools a prosecutor has and to utilize them in a white-collar case like this one is devastating for the defense."
Mr. Hilder says he expects "prosecutors will utilize their wiretap tool more often. The risk-reward for the government will be emboldened".
Prosecutors played 45 secretly recorded phone conversations between Mr Rajaratnam and his alleged co-conspirators. On one call, Mr Rajaratnam was heard discussing the exact date when Advanced Micro Devices' sale of a chip unit would be announced. On another, he said he had 100 per cent certainty that a takeover of People Support would go through despite a cautionary press release because he had a source on the company's board.
Those admissions, while deflected by his lawyers, proved difficult to overcome. The tapes were bolstered by a series of witnesses - including two business school classmates of Mr Rajaratnam - who admitted to committing crimes.
Insider trading cases can be difficult to prove since they often rely on circumstantial evidence, such as trading and phone records, leaving it to the jury to connect the dots.
The Galleon case was no different in some respects. The government presented a series of phone records followed by Mr Rajaratnam's well-timed trades in stocks of Hilton Hotels and Polycom. Prosecutors allege Roomy Khan, a stock trader, was tipped by a source at Polycom and a junior analyst at Moody's Investor Service about both companies. Ms Khan then allegedly called Mr Rajaratnam with the information.
However, the government did not call Ms Khan, who is cooperating, to testify so she could link for the jury what information was allegedly passed during the calls. The jury was asked to connect the dots and accept the government's allegation that information about Hilton's takeover and Polycom's earnings was relayed during the calls based on phone and trading records.
In his defense, Mr Rajaratnam's legal team showed the jury dozens of analyst reports and news articles suggesting there were other reasons for his trades. They hired a finance professor to testify that a lot of the supposedly secret information had already leaked into the market.