7:50am

Sat May 14, 2011
Law

Prosecutors Press On After Insider Trading Conviction

This week's conviction of hedge fund billionaire Raj Rajaratnam is breathing new life into the government's campaign against insider trading. Prosecutors in Manhattan have 11 more defendants waiting in the dock — and another big trial is scheduled to begin Monday.

Over the past few years, federal prosecutors in New York have filed insider trading charges against 47 people. More than half of them pleaded guilty — but not Zvi Goffer.

He was a trader at Rajaratnam's hedge fund who showed up several times to watch the trial of his former boss. On Monday, Goffer will be at the courthouse again — this time, for his own trial on conspiracy and securities fraud charges. Authorities say he passed out disposable cell phones to people who gave him stock tips, then took out data cards, bit them and broke the phones in half after he made illegal trades.

'Government Investigators Will Have A Field Day'

Former prosecutors say they searched for those sorts of facts when they were in the government.

"That's always some of the prosecutors' best evidence to show that there's guilty knowledge because of an attempt to cover up what was done," says Bill Johnson, who now works at the law firm Fried, Frank, Harris, Shriver & Jacobson in New York. Johnson didn't discuss specific cases, instead speaking generally about insider trading prosecution strategies.

Court papers say that investigators snooped on more than 10,000 of Goffer's phone calls to build a case that he was trading on inside information. Recordings of the secret calls will be a big focus of his trial, just as they were in the Rajaratnam case.

Former prosecutor Sol Wisenberg says that can be powerful evidence.

"If you've got somebody on a telephone whispering, or saying, 'I shouldn't be telling you this,' or talking about how he's gone around town and thrown his hard drive into a garbage can, I think that has incredible effect on a jury," says Wisenberg, who now works at the Barnes & Thornburg law firm in Washington.

Cynthia Monaco, a lawyer for Goffer, was preparing for the trial Friday and didn't return calls for comment.

The U.S. attorney in New York, Preet Bharara, says his office is committed to breaking up illegal trading networks on Wall Street. Legal experts say he's got no shortage of material.

"Every time you're up on a wiretap, you're getting all sorts of investigative leads, some of them directly relevant to the charges you end up bringing, others not," says Daniel Richman, who teaches criminal law at Columbia University. "Government investigators will have a field day working through what they've gained through this investigation."

Lessons Learned?

The impact that the hard-nosed investigation will have on Wall Street is an open question. Harvey Pitt is a lawyer who represented key players in the last major insider trading scandals decades ago.

"The lessons that were learned in the mid-'80s, a quarter of a century ago, appear either not to have been learned by a new generation of securities industry professionals or to have been forgotten by older professionals," Pitt says.

But Richman, of Columbia, says prosecutors are now making life a lot harder for traders who want to break the law, by driving them away from using phones the FBI can tap.

"When being a trader in securities starts making you look like a player in The Wire, you probably might want to reconsider what you're doing," he says.

Or, to consider even more creative options to protect themselves from federal investigators.

"Will all the hedge funds now hire companies to sweep their phones to see if they're wiretapped, even if nothing's going on, just as a precaution?" asks Matt Levine, who used to prosecute fraud cases in Brooklyn.

Levine, who now works at the Fish & Richardson law firm in New York, asked whether Wall Street executives might turn to new software programs that take inspiration from another popular TV program.

"Instant messages that, you know like in the old Mission Impossible series ... explode after or destroy themselves after 30 seconds?"

That sounds far-fetched. But when it comes to getting an edge on Wall Street, some people know no bounds. Copyright 2011 National Public Radio. To see more, visit http://www.npr.org/.