The SEC v. Galleon Management: New Insider Trading Litigation, The Discovery Fight

In January of this year, the court in Securities and Exch. Comm’n v. Galleon Mgmt, ordered  the defendants to turn over all relevant recorded wiretaps they had in their possession from a parallel criminal trial, to the SEC.  The use of the wiretaps proved pivotal in that criminal trial producing convictions on all 14 counts against Raj Rajaratnam as discussed here.  District court judge Jed Rakoff recently issued a memorandum explaining the reasoning for compelling discovery of the wiretapped communications.  Sec. Exch. Comm’n v. Galleon Mgmt., LP, No. 09 Civ. 8811, 2011 WL 1770631,(S.D.N.Y. May 11, 2011).  The court held that the Securities and Exchange Commission (“SEC”) had a presumptive right to access the wiretaps through discovery and that the defendants’ objections were too unpersuasive to overcome that presumption.

In resolving the issue, the parties agreed on two things.  First, the SEC had a right to the wiretaps because of civil discovery principles, and secondly that some of these wiretaps were relevant to the current litigation. With respect to the former, the defendants agreed to immediately turn over wiretaps obtained from the government in connection with the criminal prosecution of Rajaratnam.  In that case, the defendants had taken possession of the wiretaps through Rule 16 of the Federal Rules of Criminal Procedure and Title III of the Omnibus Crime Control and Safe Streets Act of 1968.

The defendants, however, raised three objections to the disclosure request made by the SEC.   First, they claimed the request was too broad and involved information not relevant to any claims.  Second, the defendants asserted that privacy interests superseded any rights the SEC had to wiretaps in excess of what had already been turned over to the Agency.  Third, the defendants argued that the court should hold the motion to compel discovery until after the conclusion of Rajaratnam’s criminal trial.  

The court found  these objections to be unpersuasive.  The SEC explained the relevance of all of the information it sought through discovery of the wiretaps to the court’s satisfaction.  These wiretaps included evidence on the nature and extent of relationships, patterns and practices, and the defendants’ states of mind.  

With respect to the privacy rights at issue, the defendants raised three specific issues, including a right to a fair trial in the parallel criminal case, a right to privacy for communications that may never be a public record, and the privacy rights of innocent third parties.  These claims were lessened by the court’s protective order, which allowed the parties to designate any innocent third party and any information considered personal or intimate in nature as confidential.  The court reasoned that while the defendants retained a privacy interest in the wiretaps yet to be turned over, “this interest cannot shield defendants from the disclosure of relevant, legally-obtained wiretaps to the plaintiff and its counsel.”  The court found the need to access the wiretaps immediately outweighed any minimal privacy rights. 

Further posts on the Galleon trial can be found here, and here.

The primary materials for this case may be found on the DU Corporate Governance website.