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United States v. Rajaratnam

United States Court of Appeals, Second Circuit

June 24, 2013

United States of America, Appellee,
v.
Raj Rajaratnam, Defendant-Appellant.

Argued: October 25, 2012

Defendant-appellant Raj Rajaratnam appeals from an October 25, 2011 judgment of the United States District Court for the Southern District of New York (Richard J. Holwell, Judge), convicting him, after a jury trial, on five counts of conspiracy to commit securities fraud, in violation of 18 U.S.C. § 371, and nine counts of securities fraud, in violation of 15 U.S.C. § 78j(b) and 78ff, 17 C.F.R. §§ 240.10b-5 and 240.10b5-2, and 18 U.S.C. § 2. The five charged conspiracies took place between 2003 and 2009 and consisted of Rajaratnam trading securities based on material, non-public information ("inside information") he received from certain individuals about various publicly-traded companies.

Rajaratnam raises two issues for us to consider on appeal. The first issue is whether the District Court should have suppressed the evidence obtained by the government's wiretap of Rajaratnam's cell phone. Specifically, Rajaratnam argues that the District Court erred by applying the analytical framework set forth in Franks v. Delaware, 438 U.S. 154 (1978), to determine whether suppression was warranted, and by concluding that the alleged misstatements and omissions in the government's wiretap application did not require suppression.

The second issue concerns the District Court's instruction to the jury that it could convict Rajaratnam of securities fraud if the "material non-public information given to the defendant was a factor, however small, in the defendant's decision to purchase or sell stock." Rajaratnam contends that this instruction was in error and requires us to vacate the substantive counts of conviction for securities fraud (Counts 6 through 14).

Rajaratnam's arguments are not persuasive. In affirming his judgment of conviction, we conclude that: (1) the District Court properly analyzed the alleged misstatements and omissions in the government's wiretap application under the analytical framework prescribed by the Supreme Court in Franks; (2) the alleged misstatements and omissions in the wiretap application did not require suppression, both because, contrary to the District Court's conclusion, the government did not omit information about the SEC investigation of Rajaratnam with "reckless disregard for the truth, " and because, as the District Court correctly concluded, all of the alleged misstatements and omissions were not "material"; and (3) the jury instructions on the use of inside information satisfy the "knowing possession" standard that is the law of this Circuit.

Patricia Ann Millett (Terence Joseph Lynam, Samidh Guha, Hyland Hunt, James Eamonn Sherry, on the brief), Akin Gump Strauss Hauer & Feld LLP, New York, NY, Washington, DC, and Dallas, TX, for Raj Rajaratnam.

Andrew L. Fish (Reed Brodsky, on the brief), Assistant United States Attorneys, for Preet Bharara, United States Attorney for the Southern District of New York, New York, NY, for the United States of America.

Lawrence S. Lustberg, Alicia L. Bannon, Gibbons P.C., Newark, NJ, for Amici Curiae Retired Federal Judges.

Vinoo P. Varghese, Varghese & Associates, P.C., New York, NY, for Amici Curiae National Legal Aid & Defender Association and the Bronx Defenders.

Tai H. Park, Park & Jensen LLP, New York, NY; G. Robert Blakey, Notre Dame Law School, Notre Dame, IN, for Amicus Curiae Professor G. Robert Blakey.

Before: Cabranes, Sack, and Carney, Circuit Judges.

José A. Cabranes, Circuit Judge.

In this "insider information" securities fraud case, we consider two issues on appeal raised by defendant-appellant Raj Rajaratnam. The first issue is whether the United States District Court for the Southern District of New York (Richard J. Holwell, Judge) should have suppressed the evidence obtained by the government's wiretap of Rajaratnam's cell phone. Specifically, Rajaratnam argues that the District Court erred by applying the analytical framework set forth in Franks v. Delaware, 438 U.S. 154 (1978), to determine whether suppression was warranted, and by concluding that the alleged misstatements and omissions in the government's wiretap application did not require suppression.[1]

The second issue concerns the District Court's instruction to the jury that it could convict Rajaratnam of securities fraud if the "material non-public information given to the defendant was a factor, however small, in the defendant's decision to purchase or sell stock." Rajaratnam contends that this instruction was in error and requires us to vacate the substantive counts of conviction for securities fraud (Counts 6 through 14).

Rajaratnam's arguments are not persuasive. In affirming the judgment of conviction, we conclude that: (1) the District Court properly analyzed the alleged misstatements and omissions in the government's wiretap application under the analytical framework prescribed by the Supreme Court in Franks; (2) the alleged misstatements and omissions in the wiretap application did not require suppression, both because, contrary to the District Court's conclusion, the government did not omit information about the SEC investigation of Rajaratnam with "reckless disregard for the truth, " and because, as the District Court correctly concluded, all of the alleged misstatements and omissions were not "material"; and (3) the jury instructions on the use of inside information satisfy the "knowing possession" standard that is the law of this Circuit.

BACKGROUND

Rajaratnam founded and managed the Galleon Group ("Galleon"), a family of hedge funds. When Galleon was at its pinnacle, the fund employed dozens of portfolio managers, analysts, and traders, and invested billions of dollars of client funds.

In 2011, Rajaratnam was indicted on five counts of conspiracy to commit securities fraud, in violation of 18 U.S.C. § 371, and nine counts of securities fraud, in violation of 15 U.S.C. § 78j(b) and 78ff, 17 C.F.R. §§ 240.10b-5 and 240.10b5-2, and 18 U.S.C. § 2. The conduct underlying the five charged conspiracies took place between 2003 and 2009 and consisted of Rajaratnam trading securities based on inside information he received from certain individuals about various publicly-traded companies. The alleged conspiracies involved inside information passed unlawfully to Rajaratnam from: (1) Anil Kumar, a senior partner at McKinsey & Company, Inc. (Counts 4 and 13); (2) Rajiv Goel, an executive of Intel Corporation (Counts 3, 6, 7, and 14); (3) Danielle Chiesi, a portfolio manager at another hedge fund (Counts 5, 8, 9, and 10); (4) Roomy Khan, a former Galleon employee (Count 2); and (5) other former and current Galleon employees, including one by the name of Adam Smith (Count 1). Joint App'x 268-97.

A. The Wiretap Application

Beginning in 2007, the United States Attorney's Office for the Southern District of New York ("USAO") and the Federal Bureau of Investigation ("FBI") began investigating Rajaratnam based on suspicions that he was using inside information in executing certain securities transactions. On March 7, 2008, the government sought authorization to wiretap Rajaratnam's cell phone. The wiretap application was submitted to then-United States District Judge Gerard E. Lynch and sworn to by then-Assistant United States Attorney ("AUSA") Lauren Goldberg. It included a 53-page affidavit sworn to by FBI Special Agent B.J. Kang.[2] The wiretap application stated that its purpose was to identify Rajaratnam's network of alleged inside sources, to learn how the asserted conspirators operated, and to provide admissible evidence for possible criminal prosecutions. See id. at 72.

Title III of the Omnibus Crime Control and Safe Streets Act of 1968 ("Title III"), 18 U.S.C. §§ 2510-2522, requires that wiretap applications provide "a full and complete statement of the facts and circumstance relied upon by the applicant" to establish probable cause, id. § 2518(1)(b), and 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, " id. § 2518(1)(c).[3] Accordingly, the wiretap application submitted by the government to Judge Lynch addressed (1) why "probable cause" existed to wiretap Rajaratnam's cell phone; and (2) why the proposed wiretap was "necessary."

To establish "probable cause, " the wiretap application set forth, inter alia, statements made by Rajaratnam to Roomy Khan (identified as "CS-1"), as well as summaries of conversations between Khan and Rajaratnam that Khan had recorded, which indicated that Rajaratnam and Khan were exchanging material, non-public information used to trade securities. See Joint App'x 77-81. To establish "necessity, " the wiretap application stated, inter alia, that "normal investigative techniques, " such as physical surveillance, federal grand jury subpoenas for witness testimony, review of trading records, witness interviews, use of confidential informants, and placement of undercover agents, had been tried and had "failed or reasonably appear[ed] unlikely to succeed if tried." Id. at 58, 102-12.

On the basis of these representations, Judge Lynch authorized the wiretap of Rajaratnam's cell phone on March 7, 2008. Seven subsequent wiretap applications were also approved. See note 1, ante. On October 16, 2009, based in large part on evidence obtained from the wiretap of Rajaratnam's cell phone, Rajaratnam was arrested and charged with multiple counts of securities fraud. He was indicted two months later. A Superseding Indictment was returned on February 9, 2010, and a Second Superseding Indictment was returned on January 20, 2011.

B. Rajaratnam's Suppression Motion

On May 7, 2010, Rajaratnam filed a motion to suppress the evidence obtained through the wiretap of his cell phone, claiming that the wiretap application contained certain misstatements and omissions. As relevant here, Rajaratnam took issue with the statements supplied on the government's wiretap application regarding both "probable cause" and "necessity."

On the question of "probable cause, " Rajaratnam argued that the government made misstatements and omissions regarding the reliability of Roomy Khan. In particular, he observed that the wiretap application stated that Khan "ha[d] not yet been charged with any crimes, " Joint App'x 77, and "ha[d] been cooperating with the FBI since approximately November 2007, " id. at 77 n.4. In fact, in 2001, Khan was indicted and pleaded guilty to felony wire fraud and, in 2002, she began cooperating with the government in an earlier investigation involving Rajaratnam. Rajaratnam also asserted that the wiretap application included two paraphrased summaries of recorded conversations between Khan and Rajaratnam that mischaracterized the actual recorded conversations, as we describe in detail below. See Background Part C.ii.a., post.

On the question of "necessity, " Rajaratnam argued that the wiretap application improperly omitted the fact that Rajaratnam and Galleon had been the subject of an ongoing SEC investigation, which led to, inter alia, depositions of Rajaratnam and several other Galleon employees and production for the SEC of approximately four million documents―documents that had thereafter been conveyed to the USAO.

C. The Franks Hearing

i. The Analytical Framework of Franks v. Delaware

The District Court then decided whether to hold a hearing for the purpose of considering Rajaratnam's suppression motion. In doing so, it noted that "[w]here 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" whether the alleged misstatements or omissions in the warrant or wiretap application were made intentionally or with "reckless disregard for the truth" and, if so, whether any such misstatements or omissions were "material." United States v. Rajaratnam, No. 09 Cr. 1184 (RJH), 2010 WL 4867402, at *7-8 (S.D.N.Y. Nov. 24, 2010); see United States v. Falso, 544 F.3d 110, 125 (2d Cir. 2008). In other words, "[t]o suppress evidence obtained pursuant to an affidavit containing erroneous information, the defendant must show that: (1) the claimed inaccuracies or omissions are the result of the affiant's deliberate falsehood or reckless disregard for the truth; and (2) the alleged falsehoods or omissions were necessary to the [issuing] judge's probable cause [or necessity] finding." United States v. Canfield, 212 F.3d 713, 717-18 (2d Cir. 2000) (internal quotation marks omitted); see also ...


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