The days of soft handling of financial criminals are over, as US pulls wiretaps from its arsenal

You would think they were common criminals. In growing numbers, Wall Street and other financial criminals are now facing the indignities of being on the receiving end of investigative tactics by US law enforcement agents that many probably thought were only for mobsters, drug traffickers, terrorists and their ilk. The days of wine and roses for white collar criminals are at an end.

The use of wiretaps in all federal criminal cases has increased greatly in recent years. The Administrative Office of the US Courts, which files an annual report with Congress on federal and state wiretap authorizations, as required by the Omnibus Crime Control and Safe Streets Act of 1968, said in its 2010 report, the most recent one that 3,194 wiretaps were authorized that year. That is a 34% increase over the 2,376 wiretaps in 2009, and 135% more than 2002, when there were 1,358. The 2011 report is due later this month.
The annual reports do not state the crimes for which wiretap authorizations were obtained, but only broad categories of “major offenses,” including racketeering and bribery. The reports provide no specific data on the use of wiretaps in the emerging litany of “financial crimes,” such as securities crimes, foreign corrupt payments, money laundering, antitrust violations, tax evasion and serious fraud. Congress could insist that this data be reported or the Administrative Office of the US Courts may ask the US Department of Justice to furnish the information from the data furnished by the 93 US Attorneys’ Offices and the operational divisions of Main Justice.

The new investigative tactics that financial criminals face go beyond wiretaps and include the full array of weapons federal enforcement agencies have used for decades against mobsters and drug traffickers.

Undercover operations, immunity, task forces, targeting units await financial criminals

They include undercover operations and “cooperating individuals,” immunity grants, interagency task forces, sophisticated data analysis and targeting units, and physical surveillance. Law enforcement agencies such as the FBI, SEC, IRS Criminal Investigation, Secret Service and Postal Inspection Service don’t hesitate to use these tactics in cases that include securities fraud, insider trading, FCPA violations, crimes by insiders at financial institutions, healthcare fraud and offshore tax evasion schemes.

The pivot in law enforcement tactics, some say, is driven partly by new technologies and the changing methods of communication financial criminals employ. Part of it is also due, they say, to increased awareness of the great harm financial criminals cause.

“The line between white collar crime and other crimes is gone,” Jeffrey Neiman, a former federal prosecutor who played a leading role in the prosecution of UBS for its tax evasion scheme that lured more than 50,000 US taxpayers to secret Swiss accounts that hid their US taxable earnings. Neiman, who now practices law in Ft. Lauderdale at Neiman Law, told ACFCS. “If the government wants to devote these kinds of proactive resources to financial crime cases, they now absolutely can and will.”

Federal Judge says wiretaps often vital to success of insider trading cases

The interrelated cases of Rajat Gupta, a former Goldman Sachs director, and Raj Rajaratnam, the one-time head of the hedge fund, Galleon Group, are recent examples of the rising use wiretaps in financial crime cases. Gupta is near the end of his four-week criminal trial before US district Judge Jed S. Rakoff, in New York, for passing insider tips on Goldman Sachs stock market moves and deals to Rajaratnam. The hedge fund head was sentenced to 11 years in prison last October for his securities crimes, which gave him a $20 million profit from his trading with confidential information passed on by insiders that allegedly included Gupta.

Gupta, like his alleged collaborator, may find himself in prison by the sound of his own voice. In his trial, his recorded telephone conversations with Rajaratnam, which were obtained by FBI wiretaps on Rajaratnam’s phone in 2007 and 2008, are now crackling through Rakoff’s courtroom as did the conversations of Rajaratnam, who was convicted on in May 2011 after a 55-day trial in which over 40 wiretapped phone conversations were played for the jury.

Gupta’s attorneys objected to the admission of the Rajaratnam wiretaps in evidence, but Rakoff ruled they could be played at trial, saying, “The simple truth is that, in both this and numerous other cases, insider trading cannot often be detected, let alone successfully prosecuted, without the aid of wiretaps.”

Rajaratnam’s conviction has been appealed to the US Second Circuit of Appeal, based partly on grounds that the prosecutors improperly introduced wiretap evidence at trial.

Insider trading and organized crime similarities bolster logic of wiretap use

Sammi Malik, a lawyer at Baker Hostetler in New York, says the wiretaps in insider trading cases underscore the similarities between insider trading networks and organized crime. Both tend to be tight-knit groups off-limits to outsiders, and neither leaves a well-documented evidentiary trail.

“Even with posts and tweets leaving a record of daily interactions online, we’re dealing with traders that are on their cell phones 24 hours a day,” Malik told ACFCS. “These people aren’t leaving the paper trail they used to. As crimes grow more sophisticated, you need more sophisticated tools to fight them.”

Robert Anello, partner at Morvillo, Abramowitz, Grand, Iason, Anello & Bohrerer in New York, and author of the column, White Collar Crime, in the New York Law Journal, agrees that financial crimes have grown in size and complexity. That has triggered an effort by law enforcement agencies to use more potent investigative weapons.

“It’s now common to have white collar cases that cross time zones, country borders, and languages,” he says, “It’s somewhat surprising that it’s taken this long for wiretaps to be used regularly [in white collar cases].”

Anello says law enforcement agents are becoming well-versed in technological tools, increasing their willingness to utilize wiretaps and other tools, such as the interception of texts and e-mails.

“The skills are very different these days. Agents have to be IT experts, and have a working knowledge of computer forensics,” Anello adds.

Financial crimes, such as insider trading, have also received more media attention since the 2008 financial crisis, Malik notes, prompting a greater public outcry and harsher government response. “The climate since 2008 has definitely contributed to the expansion of these investigative tactics.”

Wiretaps and informants carry more punch than bank records with juries

Another driving force in the rising use of wiretaps and undercover operations in financial crime cases is their high impact on juries at trial, which is much greater than bank and business records are likely to engender.

“Wiretaps have a human touch that gives more weight to the evidence,” says Malik. “Regardless of how innocuous the statements are, that they are the defendant’s voice and own words make them much more potent than documentary evidence.”

Based on his experience with tax evasion prosecutions, Neiman agrees. “It is tough evidence for a defense attorney to overcome,” he says. “Whether it’s wiretaps or video recordings, it eliminates the he-said she-said, and restricts the interpretation a defense attorney can apply.”

Prosecutors face risks with wiretaps and informants at trial

Despite the rewards, getting authorization for wiretaps and introducing the recorded conversations at trial pose unique risks for prosecutors who bring the financial crime cases.  

“Prosecutors weigh the benefits of gathering evidence that is unbelievable versus the headache and heartache of collecting it and getting it admitted in court,” says Neiman. “It can be time-consuming, overwhelming, and fraught with hazards.”

One hazard, he says, is introducing recorded conversations of informants at trial and running the risk that the jury will concentrate on them instead of other evidence. If the jury perceives weaknesses in the wiretaps or the character of the informant, it can completely derail a case, the former prosecutor says.

The so-called “Africa sting” case is a much-publicized Foreign Corrupt Practices Act criminal case against 22 persons charged with agreeing to bribe purported officials of Gabon, who were undercover FBI agents and cooperating individuals, to secure military contracts. The cases blew up in the government’s hands. Two trials arising from the sting, which Neiman calls a “complete and utter debacle,” produced three acquittals and a hung jury. The trial judge and the jurors blasted the prosecutors about the unreliability of the informant and other key witnesses.

Rajaratnam trial set precedent on expansion of wiretaps into financial crime realm

The US law regulating the use of wiretaps is codified in Title III of the Omnibus Crime Control and Safe Streets Act (Title 18, USC Section 2510-2522), which requires government agencies to obtain judicial approval before intercepting “wire, oral or electronic communications.”

Title III also states that wiretaps may only be used to investigate certain enumerated offenses. The list has grown significantly since the law was signed in 1968. It includes money laundering, bank fraud, bribery of public officials and wire fraud. But, some violations that fall under the rubric of financial crime, including securities and tax fraud and foreign corrupt payments, are not mentioned. This has caused prosecutors to seek creative avenues to obtain wiretap authorizations.

“More and more, they’ve tried to bootstrap it in these cases,” says Malik, who explains that prosecutors have convinced judges to grant and authorize wiretaps in securities fraud cases by showing the close relationship between insider trading and wire fraud.

The Rajaratnam trial was one of the first securities fraud cases to admit wiretaps, and thus established a major precedent in financial crime jurisprudence. Judge Richard Holwell, who approved admission of the wiretap evidence, said, “When the government investigates insider trading for the bona fide purposes 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.” That rationale, say Malik and Neiman, could allow prosecutors to utilize wiretaps for other financial crimes not listed in Title III.

As wiretaps become a fixture, some question their effectiveness

It is unclear whether wiretaps will lead to a surge in financial crime convictions.

“There’s certainly been an increase in wiretaps, but their effectiveness has not been proven,” Robert Anello, of Morvillo, Abramowitz, et al., says.

Anello notes that while wiretap usage in financial crime cases is rising, convictions in cases where wiretaps are used have remained largely stagnant. According to the Administrative Office of the Courts, in 2000 there were 736 convictions in cases where wiretaps were authorized. By 2010, the number of convictions had increased to only 800, despite the fact that 2,000 more wiretaps had been employed.

Anello suggests the rise is a consequence of degraded public sensitivity to privacy rights in an era where social media is full of revelations by millions of people of intimate details of their existence.

“The increase in wiretaps may be a result of erosion in the courts and public of the perception of the intrusiveness of these tools,” says Anello. “I don’t know if it’s a good thing that courts are so cavalier about granting these.”

Some believe that increased wiretap use may spark a wider debate about its propriety in financial crimes cases. “In the age of social media, the public is having problems with privacy already,” says Malik. “They may not be receptive to an expansion of wiretapping. Over the past eight years, we’ve had a pretty serious national conversation about privacy. And wiretaps are a very serious invasion of privacy.”