Securities and Exchange Commission v. Galleon Management, LP et al

Filing 194

MEMORANDUM; granting 176 Motion to Compel. That on December 17, 2010, the SEC renewed its motion to compel defendants Raj Rajaratnam and Danielle Chiesi to produce to the SEC all relevant wiretapped communications in their possession. Accordingly, the Court concluded that the SEC's right of access to the wiretaps significantly outweighed defendants' remaining privacy interests. The Court also considered defendants' other arguments and found them without merit. Accordingly, the Court issued, and now reaffirms, its January 31, 2011 Order granting the SEC's renewed motion. (Signed by Judge Jed S. Rakoff on 5/10/11) (pl)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-- -- -- -- ------- ----- ---- -- --- x
SECURITIES AND EXCHANGE COMMISSION,
09 Civ. 8811 (JSR)

Plaintiff,

MEMORANDUM

-v-

GALLEON MANAGEMENT, LP, et al.,
Defendants.

JED S. RAKOFF, U.S.D.J.

On December 17, 2010, the SEC
defendants Raj Rajaratnam and Danielle Chiesi to produce to the SEC
all relevant wiretapped communications in their possession.

On

January 5, 2011, defendants filed opposition papers in which they
agreed to produce certain of the wiretapped communications and
objected to producing others.

The SEC filed reply papers on January

11, 2011, and the Court heard oral argument on January 21, 2011.
After careful consideration, the Court issued a "bottom-line" ruling
on January 31, 2011 ordering defendants to produce all of the
requested communications in two phases (as well as severing defendant
Zvi Goffer from the above captioned action and setting a schedule for
further proceedings in this case).

Although the defendants have long

since complied with the January 31 Order, a court should always state
its rulings, and consequently the Court issues this Memorandum to set
forth the reasons for its January 31 Order.

By way of background, on October 16, 2009, the United States
Attorney's Office unsealed criminal complaints charging several
defendants, including Raj Rajaratnam and Danielle Chiesi, with
securities fraud and conspiracy.

See Securities and Exch. Comm'n v.

Rajaratnam, 622 F.3d 159, 164 (2d Cir. 2010).

The same day, the SEC

filed the instant case, charging Rajaratnam, Chiesi and others, with
insider trading and conspiracy, largely on the basis of the same
conduct alleged in the criminal case.

Id. at 165; Securities and

Exch. Comm'n v. Rajaratnam, No. 09 Civ. 8811 (JSR).

Two months later,

Rajaratnam and Chiesi were indicted for insider trading and
conspiracy, and their criminal case was assigned to Judge Richard
Holwell.

See United States v. Rajaratnam, No. 09 Cr. 1184 (RJH).

Meanwhile, a separate indictment arising from the same investigation
and charging similar crimes was filed against other defendants,
including Goffer, and this separate criminal case was assigned to
Judge Richard Sullivan.

See United States v. Goffer, No. 10 Cr. 56

(RJS) .
On December 23, 2009, in connection with the parallel criminal
actions and pursuant to Rule 16 of the Federal Rules of Criminal
Procedure and Title III of the Omnibus Crime Control and Safe Streets
Act of 1968, 18 U.S.C.A

§§

2510-2522 ("Title III"), the United States

Attorney's Office provided Rajaratnam and Chiesi with tapes of
wiretapped conversations and the corresponding electronically

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searchable line sheets.

In turn, the SEC served demands in the

instant action that the defendants produce to the SEC the tapes of
the wiretapped conversations pursuant to Federal Rules of Civil
Procedure Rules 26 and 34.

Defendants Rajaratnam and Chiesi opposed

the demands, and the SEC moved to compel compliance.

Following

briefing and oral argument, the Court granted the SEC's motion to
compel the production of the tapes.

02/09/10 Memorandum Order

("Discovery Order").
Rajaratnam and Chiesi appealed to the Second Circuit, which, on
September 29, 2010, granted defendants' request for mandamus, vacated
the Discovery Order, and remanded the case for further proceedings.
See Securities and Exch. Comm'n v. Rajaratnam, 622 F.3d 159 (2d Cir.
2010).

The Second Circuit concluded, inter alia, that " [w]hile the

district court was correct that the SEC had a legitimate right of
access to the wiretap materials, it could not properly balance that
interest against the privacy interests at stake while the legality of
the wiretaps was still unresolved."

Id. at 187.

This was a

reference, in particular, to the fact that a motion to suppress the
wiretaps was pending before Judge Holwell.

at 185-86.

On

November 24, 2010, however, Judge Holwell denied the suppression
motions filed by Rajaratnam and Chiesi in their criminal case and
determined that the wiretap intercepts were legally obtained.

See

IAt the time this Court granted the Discovery Order, neither
of the defendants had in fact moved to suppress the wiretaps.
3

United States v. Rajaratnam, No. 09 Cr. 1184
("Holwell Order")

(S.D.N.Y. Nov. 24, 2010)

.2

In light of Judge Holwell's ruling, the SEC, on December 17,
2010, renewed its motion to compel defendants Rajaratnam and Chiesi to
"produce all relevant wiretapped communications in their possession,
custody or control."

See Plaintiff's Memorandum of Law in Support of

its Renewed Motion to Compel Production of Relevant, Legally Obtained
Wiretapped Communications ("SEC Mem.") at 1.

The SEC also sought

"copies of all corresponding electronically searchable line sheets
that provide the identity of the participants in such intercepts and
all draft summaries and transcripts of such intercepts that were
produced to [Rajaratnam and Chiesi] by the United States Attorney's
Office for the Southern District of New York ('USAO')."

Id.

Defendants filed opposition papers, to which the SEC responded, and
oral argument was held on January 21, 2011, following which the Court
issued its January 31, 2011 Order.
From the submissions, it became apparent that the parties were
now in agreement as to at least two important issues.

First, all

parties agreed that they were bound by the Second Circuit's conclusion
- which was also the centerpiece of this Court's prior ruling

- that

the SEC has a presumptive right of access to the wiretaps in question
where the defendants have, through discovery in the parallel criminal
2 Similarly, Judge Sullivan subsequently denied a similar
motion to suppress the wiretaps in the companion case before him.
United States v. Goffer, No 10 Cr. 56 (RJS) , 2011 U.S. Dist.
LEXIS 45156 (S.D.N.Y. Apr. 20, 2011)

4

case, already obtained this information.

See Securities and Exch.

Comm'n v. Rajaratnam, 622 F.3d 159, 180 (2d Cir. 2010)

("(W]here the

civil defendant has properly received the Title III

s at issue

from the government, the SEC has a presumptive right to

scovery of

these materials from its adversary based on the civil discovery
principle of equal information.ff).
Second, both defendants conceded that a certain number of the
wiretaps were, without question, relevant to this action.

For

example, Rajaratnam acknowledged that he possessed approximately 240
wiretapped conversations concerning the particular securities
Defendant Rajaratnam's

referenced in the SEC's Amended Complaint.
Memorandum of Law

Support of its Opposition to Plaintiff's Renewed

Motion to Compel Production of Relevant, Legally Obtained Wiretapped
Communications ("Rajaratnam Mem.ff) at 2 n.2,

6 n.3.

Chiesi similarly

acknowledged that she had possession of an unspecified number of
wiretapped conversations that related directly to trading in the four
securities at the heart of the SEC's all
01/21/11 transcript.

ions against her.

See

During oral argument, both defendants agreed to

immediately produce these concededly

wiretaps to the SEC.

Id.
There still remained three objections from the defendants.
First, Rajaratnam and Chiesi argued that the SEC's discovery request
was overbroad and sought to elicit information (beyond that consented
to) not relevant to the claims alleged

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the SEC's Amended Complaint.

Rajaratnam Mem. at 10-13.

Second,

fendants argued that their

privacy interests continued to outweigh the SEC's right of access to
the requested communications beyond those consented to.

rd. at 7-9.

Third, the defendants contended that, at the very least, the Court
should postpone the production

any wiretaps (beyond those

defendants had consented to produce) until the conclusion of
Rajaratnam's criminal trial.

at 6.

The Court found none of these arguments persuasive.
correctly explained the relevance

The SEC

each category of information

requested as follows:
The first category seeks communications about the companies and
stocks at issue in this action.
Such communications clearly are
relevant to the reasons for the trades defendants allegedly
conducted, and to defendants' knowledge of information concerning
the companies alleged.
Defendants concede the relevance of this
category. The third category seeks communications concerning the
relationships between and among the defendants and their sources.
Communications in this category relate to the nature and extent of
their contacts, which is relevant to establishing, among other
things, the confidences they placed in each other, the meaning and
import of words they conveyed, and the benefit the alleged tippers
and traders received, promised, or expected from the passing of
information.
Categories two, four, five, and six seek evidence
relevant to a defense that communications regarding the trading at
issue here was consistent with lawful information gathering
incident to stock trading and to whether defendants' conduct with
respect to these communications and the trading deviated with their
past patterns and practices.
Category seven is relevant to
defendants' respective states of mind, i.e., whether they were
aware of any investigations into their own conduct or the conduct
of those they communicated with that would color the meaning of
their communications, and what their respective understanding was
of insider trading and the lawfulness of particular conduct.
Plaintiff's Reply Memorandum of Law in Further Support of its Renewed
Motion to Compel Production of Relevant, Legally Obtained Wiretapped

6

Communications ("SEC Reply") at 6-7.

The Court totally agreed: all of

the information sought is plainly relevant to the claims and defenses
that may be asserted at trial.
Rule 26(b) (1).

Federal Rules of Civil Procedure

Accordingly, the Court concluded that the SEC's motion

to compel was not overbroad.
As for the defendants' privacy interests, these were obviously
less significant after Judge Holwell's determinations that the
wiretaps were legally obtained, but were still not eliminated.
securities and Exch. Comm'n v. Rajaratnam, 622 F.3d 159, 184-85 (2d
cir. 2010)

(liThe

t that

tIe I I I does not impose an absolute ban

on civil discovery orders of the kind at issue here does not mean that
the concerns for privacy that underl

Title I I I are irrelevant or can

be disregarded. To the contrary, we conclude that those concerns, and
the evident desire of Congress to limit disclosures of the fruits even
of lawful wiretapping, must be carefully weighed before
ordered.").

In particular defendants argued that

scovery is

following three

privacy interests remained at stake: "(1) Mr. Rajaratnam's
constitutional right to a

trial in the criminal case;

(2) his

privacy interest in communications that are not yet and may never be
part of the public record; and (3) the privacy rights of innocent
third parties who are not before the Court."

Rajaratnam Mem. at 9.

The weight of these interests is diminished considerably,
however, by the fact that all discovery in this case is subject to the
Court's December 16, 2009 Protective Order.

7

For example, paragraph 2

of the Order specif

s that parties may designate as confidential "any

information of a personal or intimate nature regarding any individual"
and "any other category of information hereinafter given confidential
status by this Court."
In its bottom-l

See 12/16/09 Protective Order

~~

2 (d),

(e).

Order, the Court authorized defendants to designate

as confidential the identities of any innocent third parties whose
conversations have been captured by the wiretaps.

Further, defendants

may designate as confidential any information of a personal or
intimate nature regardless of its source.

In the Court's view, this

Order adequately protects the privacy interests of the defendants
and innocent third part

who are not before the Court.

Moreover, as

the SEC points out, it appears that the defendants' privacy interests
and the interests of third parties may be minimal in any event.
Mem. at 9 10.

SEC

Among other things, Judge Holwell rejected the

defendants' arguments that the Government did not properly minimize
the interceptions.

Holwell Order at 67.

Furthermore, several of the privacy interests identified by the
defendants were bound up with defendants' request to postpone further
discovery until the conclusion of Rajaratnam's criminal trial.
of course, that request is moot.

Now,

But the interests it sought to

protect at the time of the January 31 Order were, again, adequately
protected by the Court's Protective Order, which limits the disclosure
of

1 confidential discovery material to the part

and their

counsel, witnesses and experts who sign non disclosure agreements, and

8

the Court and its support personnel.
5.

See 12/16/09 Protective Order'

The production of these materials to the SEC could therefore have

had no effect on Rajaratnam's right to a

trial.

Similarly,

although defendants have a privacy interest in the remaining
communications, this interest cannot shield defendants from the
disclosure of relevant, legally-obtained wiretaps to plaintiff and its
counsel.
Moreover, even if the Court were to assume, arguendo, that the
Court's protective Order does not entirely eliminate privacy concerns,
whatever privacy interests remain after the denial of defendants'
suppression motion and the Court's promulgation of its Protect
Order had to be balanced against the SEC's weighty interest in
obtaining the wiretaps without further delay.

As the Second Circuit

explained, the SEC has already suffered and continues to suffer
prejudice as a result of defendants' unilateral access to the
wiretaps:
[Defendants'] unilateral access to this information in preparing for
trial would surely be prejudic
to the SEC, because, even if
[defendants] do not use any of the recordings at the civil trial,
they could still use the materials in preparation
trial -- for
example, by preparing to cross-examine witnesses at deposition or at
trial, by attacking the credibility of witnesses, or by deciding how
to structure their defense. Placing the parties on a level playing
field with respect to such functions is the very purpose for which
c
1 discovery exists. For this reason, we find that the SEC's
right of access is significant.
Rajaratnam, 622 F.3d at 182.

Having set a firm and fixed trial date

of August 22, 2011, the Court concluded that any further delay, even
until the end of Rajaratnam's criminal trial, would cripple the SEC in
9

its t

preparation, given that it would take months for the SEC to

ew the thousands of conversations at issue, whereas the defendants
had

had access to these voluminous materials for over a year.

Accordingly, the Court concluded that the SEC's right of access to the
significantly outweighed defendants' remaining privacy
sts.
The Court also considered defendants' other arguments and found
them without merit.

Accordingly, the Court issued, and now reaffirms,

its January 31, 2011 Order granting the SEC's renewed motion.

Dated:

New York, New York
May 10, 2011

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