Wiretapping Wall Street

by Thomas Brom

One of the themes explored in The Wire, HBO's long-running series on Baltimore street life, is the cat-and-mouse surveillance game between drug dealers and police. In the 2004 episodes, dealers are still using pagers. As the wiretaps catch up, the dealers switch to cell phone "burners," swap out SIM cards, and send coded text messages. Over five seasons, the game stays about even.

Segue to two Wall Street insider trading cases brought last year against 21 defendants, including hedge fund managers, securities traders, corporate executives, and lawyers (SEC v. Galleon Mgmt. LP, No. 09-8811 (S.D.N.Y. filed Oct. 16, 2009) and SEC v. Cutillo, No. 09-9208 (S.D.N.Y. filed Nov. 5, 2009)). Most of the defendants were associated with the Galleon Group hedge fund or Zvi Goffer, a registered representative at Echotrade who had once worked at Galleon.

There are parallel civil and criminal proceedings. Prosecutors relied on consensual recordings by informants, and on some 14,000 wiretap intercepts - the first used in an insider trading case under Title III of the Omnibus Crime Control and Safe Streets Act of 1968 (18 U.S.C. § 2510 et seq) - to identify $53 million in purported illegal profits.

According to the indictment, at one point Goffer allegedly removed the memory card from his cell phone, bit it, broke the phone in half, threw away one half and then instructed his tippee to throw away the other half. Robert Khuzami, director of the SEC's enforcement division, observed at a press conference: "Certain moral truths should be self-evident. And there should be a moment - hopefully before you're holding a bag of cash, delivered to you by somebody code-named the 'Octopussy' - that causes anyone in a position to tip or trade inside information, to think twice before taking such a misguided step. And if you find yourself chewing the memory card in your cell phone to destroy your record of your misconduct, something has gone terribly wrong with your character."

A wire on Wall Street? "Contrary to the views of some, court-authorized Title III wiretaps are not statutorily reserved for unsavory drug traffickers and mobsters," said Preet Bharara, U.S. Attorney for the Southern District of New York. "Why use wiretaps to investigate insider trading, for example? Because it is an exceedingly difficult crime to prove - especially when it involves hedge funds, whose sheer volume of trading can be used to mask a sale or purchase of a security based on material nonpublic information."

But Title III wiretaps, called "super warrants" by law enforcement, can also be troublesome for prosecutors. "You've got to jump through a lot of hoops before presenting the case to a judge," says Tim Crudo, a former federal prosecutor and partner in the white-collar defense group at Latham & Watkins in San Francisco. Those hoops include a showing of probable cause, requisite necessity, the failure of other methods, particularity of subject, and the identities of the persons to be tapped. In any case, a court order is good for no longer than 30 days before it must be renewed. "It's easier to get a wiretap when an individual has flipped and agrees to wear a consensual body wire, and use that evidence in court," Crudo says.

Cris Arguedas, a criminal defense attorney at Arguedas Cassman & Headley in Berkeley, adds, "I don't see prosecutors using wires on a regular basis - it's not that difficult to get authorization, but it's labor intensive. For prosecutors, the good part is that they might capture incriminating evidence. But they also capture mitigating evidence. Just snips don't tell the whole story."

Still, judges almost never deny wiretap requests. According to the Administrative Office of U.S. Courts, state and federal prosecutors made 1,891 applications for wiretap orders in 2008, and courts granted every one. The report noted that 95 percent of the locations specified were portable devices carried by individuals, such as digital pagers and cell phones.

In Galleon, defense attorney John Dowd of Akin Gump Strauss Hauer & Feld has filed a motion to suppress the Title III recordings based on, among other things, the prosecutors' alleged material misrepresentations and omissions in wiretap affidavits and applications. But criminal defense attorney Victor Sherman, a principal in Sherman & Sherman in Santa Monica who specializes in wiretap cases, says, "Courts rarely suppress intercepts - it almost never happens in drug cases. Incriminating evidence is captured in a defendant's own words - police love it."

After Galleon, hedge funds could become a target of opportunity. "The use of real-time monitoring signals a new tactic," says Peter Henning, a professor at Wayne State University Law School in Detroit and a former senior attorney in the SEC's enforcement division. "But hedge funds collect a whole bag of information before making a decision. You still have to sort out the noise."

The Galleon cases have made hedge funds paranoid on both coasts. "Compliance officers are asking, 'What can you do about rogue employees?' says Jay Gould, head of the investment funds practice in the San Francisco office of Pillsbury. "How are you going to monitor people to prevent them from bringing down an entire fund? But Galleon was different, because it's alleged the entire organization was based on eliciting and using material nonpublic information."

In February, Marc Fagel, the SEC's regional director in San Francisco, told a Bar Association of San Francisco forum that his office was tired of bringing "whack-a-mole" insider trading cases against individuals. He said the SEC - which isn't authorized to wiretap - is using software programs and industry reports to locate unusual trading patterns, and then referring cases to the U.S. Attorney's office.

Federal prosecutors are using their own new surveillance tools. In 2007 the FBI released documents describing its Digital Collection System Network (DCSNet), which connects wiretapping rooms to switches controlled by traditional land-line operators, Internet-telephony providers, and cellular companies. The software suite includes components to record outgoing and incoming numbers, as well as the content of calls and text messages. "Together," according to a review of the software in Wired magazine, "the surveillance systems let FBI agents play back recordings even as they are being captured, create master wiretap files, send digital recordings to translators, track the rough location of targets in real time using cell-tower information, and even stream intercepts outward to mobile surveillance vans."

That's more than a few steps ahead of cell phone burners or swapped-out SIM cards. "Greed, sometimes, is not good," Bharara said at the announcement of the Galleon prosecution. "Today, tomorrow, next week, the week after, privileged Wall Street insiders who are considering breaking the law will have to ask themselves one important question: Is law enforcement listening?"

"It's naïve to think that Galleon is the only one out there," Pillsbury's Gould says. The Wall Street wire could be a game-changer.

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