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Securities and Exchange Commission v. Rajaratnam

September 29, 2010

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF-APPELLEE,
v.
RAJ RAJARATNAM, DANIELLE CHIESI, DEFENDANTS-APPELLANTS,
GALLEON MANAGEMENT, LP, ALIHARIRI, ALIT. FAR, ANILKUMAR, CHOO-BENG LEE, DAVIDPLATE, DEEPSHAH, FAR& LEELLC, GAUTHAMSHANKAR, MARKKURLAND, NEWCASTLEFUNDSLLC, RAJIVGOEL, ROBERTMOFFAT, ROOMYKHAN, S2 CAPITAL MANAGEMENT, LP, SCHOTTENFELDGROUPLLC, SPHERIXCAPITALLLC, STEVEN FORTUNA, ZVIGOFFER, DEFENDANTS.



SYLLABUS BY THE COURT

Defendants-Appellants Raj Rajaratnam and Danielle Chiesi appeal from a discovery order of the district court (Jed S. Rakoff, Judge) compelling them to disclose to Plaintiff-Appellee Securities and Exchange Commission wiretapped conversations provided to them by federal prosecutors in a related criminal case for use in this civil enforcement action against Appellants. We hold that, while Title III of the Omnibus Crime Control and Safe Streets Act of 1968, 18 U.S.C. §§ 2510-2522, does not absolutely prohibit the disclosure of wiretap conversations by defendants in a civil enforcement proceeding to a civil enforcement authority where the defendants have received the wiretaps lawfully pursuant to Title III, a district court addressing a discovery demand for such materials must balance the right of access to these materials against the privacy interests at stake. In the instant case, we conclude that although we have no jurisdiction over an interlocutory appeal from this order, a writ of mandamus is warranted, because the district court clearly exceeded its discretion in ordering disclosure of thousands of conversations involving hundreds of parties, prior to any ruling on the legality of the wiretaps and without limiting the disclosure to relevant conversations.

VACATED AND REMANDED.

The opinion of the court was delivered by: Gerard E. Lynch, Circuit Judge

Argued: July 8, 2010

Before: RAGGI, LYNCH, and CHIN, Circuit Judges.

Defendants-Appellants Raj Rajaratnam and Danielle Chiesi (hereinafter, "Appellants") appeal from a district court (Jed S. Rakoff, Judge) discovery order compelling Appellants to disclose thousands of wiretapped conversations, originally provided to Appellants by the United States Attorney's Office ("USAO") in parallel criminal proceedings, to Plaintiff-Appellee Securities and Exchange Commission ("SEC") for use in this civil enforcement action against Appellants. We conclude that Title III of the Omnibus Crime Control and Safe Streets Act of 1968 ("Title III"), 18 U.S.C. §§ 2510-2522, does not absolutely prohibit the disclosure of wiretapped conversations from defendants in a civil enforcement proceeding to a civil enforcement agency where the defendants have received those conversations lawfully pursuant to Title III. However, in deciding whether and how much to disclose, a district court must balance the agency's right of access to these materials in civil discovery against the privacy interests at stake. In the instant case, we conclude that although there is no interlocutory jurisdiction over an appeal from this order, a writ of mandamus is warranted, because the district court clearly exceeded its discretion in ordering disclosure of thousands of conversations involving hundreds of parties, prior to any ruling on the legality of the wiretaps and without limiting the disclosure to relevant conversations.

BACKGROUND

On October 16, 2009, the United States Attorney's Office for the Southern District of New York unsealed criminal complaints charging several defendants, including Appellants Raj Rajaratnam and Danielle Chiesi, with securities fraud and conspiracy. The same day, the SEC filed a civil complaint against Appellants and others, charging them with insider trading and conspiracy based on the same conduct at issue in the criminal case. Two months later, Appellants were indicted for insider trading and conspiracy.

The Appellants' criminal case was assigned to Judge Richard Holwell. See United States v. Rajaratnam, No. 09 Cr. 1184 (RJH). Meanwhile, a separate indictment charging similar crimes against other defendants, arising from the same investigation, was assigned to Judge Richard Sullivan. See United States v. Goffer, No. 10 Cr. 56 (RJS). The instant civil SEC action was assigned to yet a third judge, Judge Jed Rakoff.

While the Appellants' civil and criminal cases are proceeding before different judges, both cases revolve around the same allegations: that Appellants engaged in widespread and repeated insider trading at several hedge funds, including Galleon Management, LP, a firm founded by Appellant Rajaratnam, where he remains the managing general partner, and New Castle Funds LLC, where Appellant Chiesi was a hedge fund manager and investment consultant. According to the SEC, the scheme, which allegedly generated over $52 million in illegal profits, involved tips from insiders concerning "market moving events such as quarterly earnings announcements, takeovers, and material contracts," that spurred the defendants to trade shares of numerous public companies illegally.

The criminal investigation into these allegations included court-ordered wiretapping of communications between the defendants and others. According to Appellants, the wiretapped conversations, which spanned sixteen months, included 18,150 communications involving 550 separate individuals, which were intercepted from ten separate telephones -- including Appellants' home, office and mobile phones. As part of criminal discovery, the USAO provided to Appellants copies of these wiretapped communications, the orders authorizing the wiretaps, and the government's applications for those orders. The USAO did not, however, share those materials with the SEC.*fn1

The SEC instead sought access to the wiretap recordings by demanding them from Appellants in discovery in the civil case before Judge Rakoff. Appellants opposed the demand on the grounds that the materials were not relevant and that disclosure was prohibited by Title III, the statute that authorizes such wiretaps. The SEC then moved to compel disclosure.

The district court heard oral argument on the motion, and, pursuant to a written opinion, ordered Appellants to produce the wiretapped conversations to the SEC and to any other party to the civil action that demanded them.*fn2 The court noted that while the USAO had not shared the wiretap materials with the SEC, the Appellants possessed these materials, they apparently asserted the right to share them with other defendants pursuant to a joint defense agreement, and no protective order had been issued in the criminal case barring Appellants from using the wiretap materials in the civil case, or from disclosing them to the SEC. It found that "the notion that only one party to a litigation should have access to some of the most important non-privileged evidence bearing directly on the case runs counter to basic principles of civil discovery in an adversary system and therefore should not readily be inferred, at least not when the party otherwise left in ignorance is a government agency charged with civilly enforcing the very same provisions that are the subject of the parallel criminal cases arising from the same transactions."*fn3

The court acknowledged Appellants' argument that the privacy and other concerns that led Congress to pass Title III weighed in favor of reading the statute as implicitly prohibiting any disclosure of recordings not expressly authorized, but considered that argument foreclosed by our statement in In re Newsday, Inc., 895 F.2d 74 (2d Cir. 1990), that while "Title III generates no right of access, [] it is a non-sequitur to conclude the obverse: that Congress intended § 2517 . . . to forbid public access by any other means on any other occasion." Id. at 77. The court then noted that Title III made clear that "[a]ny person" could disclose wiretap contents during testimony, and therefore it would be "absurd for the civil attorneys preparing the witness not to have access to the wiretap recordings beforehand."

To accommodate the relevant privacy interests and because Appellants indicated that they would move to suppress the wiretap recordings on the ground that they were unlawfully obtained, the court entered a protective order prohibiting disclosure of the wiretap recordings to any non-party until, at a minimum, a court of competent jurisdiction had ruled on the suppression motion. Appellants appealed the order and we granted a stay pending appeal.*fn4

At the time of the district court's order, it had scheduled the civil trial to begin on August 2, 2010. However, when Judge Holwell, who is presiding over Appellants' parallel criminal proceeding, set the criminal trial for October 25, 2010, the USAO intervened and moved to adjourn the civil trial until after the completion of the criminal trial. While no party opposed this adjournment, the district court reserved judgment "because of the strong public interest in having cases of this kind move forward promptly."

Following our grant of a stay of the discovery order, however, the court found that this stay, along with an indication from the bench during the oral argument on the stay motion that the appeal could be affected by a resolution of the suppression motion in the criminal case then scheduled to be heard on June 17, 2010, "tipped the balance toward adjournment." Because resolution of the wiretap issue could not reasonably be expected prior to July 2010 and because counsel for the Appellants would by then be preoccupied preparing for the October criminal trial, the court found that the August trial date was no longer practical and therefore, "with reluctance," adjourned the civil trial until February 14, 2011.*fn5 At present, the suppression motion has yet to be decided, and the civil trial remains scheduled for February 2011.

DISCUSSION

In deciding this appeal, we first address whether we have jurisdiction to review the district court's interlocutory order, and conclude that we lack jurisdiction to hear an appeal of the district court's discovery order. We then consider whether a writ of mandamus is warranted, and conclude that it is, because the district court clearly exceeded its discretion by ordering disclosure of the wiretaps without awaiting a ruling on the legality of the wiretaps or limiting the disclosure order to relevant conversations.

I. Do We Have Appellate Jurisdiction to Review the District Court's Order?

Section 1291 of the Judicial Code provides federal courts of appeals with jurisdiction to review "final decisions of the district courts." 28 U.S.C. § 1291; accord Mohawk Indus., Inc. v. Carpenter, 130 S.Ct. 599, 603 (2009). A "final decision is typically one by which a district court disassociates itself from a case." Mohawk, 130 S.Ct. at 604-05 (brackets and internal quotation marks omitted). However, "a small set of prejudgment orders that are 'collateral to' the merits of an action and 'too important' to be denied immediate review," id. at 603, quoting Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 546 (1949), are also considered "final decisions" for purposes of the statute. Id. This small set of interlocutory orders that are deemed "final" "includes only decisions [(1)] that are conclusive, [(2)] that resolve important questions separate from the merits, and [(3)] that are effectively unreviewable on appeal from the final judgment in the underlying action." Id. at 605 (internal quotations marks omitted).

In determining whether an interlocutory order fits within this exception, we do not engage in an "individualized jurisdictional inquiry" into the specific order appealed from. Id. (internal quotation marks omitted). Instead, our focus is on "the entire category to which a claim belongs." Id. (internal quotation marks omitted). So long as the category of claim can be vindicated by other means, "the chance that the litigation at hand might be speeded, or a particular injustice averted, does not provide a basis for jurisdiction under § 1291." Id. (internal quotation marks and brackets omitted). The Supreme Court has emphasized that the collateral order exception to the final judgment rule must "never be allowed to swallow the general rule that a party is entitled to a single appeal," and that "[p]ermitting piecemeal, prejudgment appeals . . . undermines efficient judicial administration and encroaches upon the prerogatives of district court judges, who play a special role in managing ongoing litigation." Id. (internal quotation marks omitted); see also id. at 609 ("[W]e reiterate that the class of collaterally appealable orders must remain 'narrow and selective in its membership.'").

The parties disagree about how to define the category of orders to which the challenged order belongs. The SEC would define the category as "civil discovery orders requiring disclosure of wiretap materials," while Appellants would define it as "wiretap disclosures to third parties." We conclude that the category should be described more broadly as discovery orders allegedly adverse to a claim of privilege or privacy, and that, as we recognized in our recent decision in In re City of New York, 607 F.3d 923 (2d Cir. 2010), we lack jurisdiction to review such orders.

In City of New York, we addressed whether or not a writ of mandamus was appropriate to review a discovery order requiring the City of New York to produce "sensitive intelligence reports" prepared by undercover police officers to class action plaintiffs. Id. at 928. The City argued that the documents were protected from disclosure by the "law enforcement privilege." Id. In explaining why a petition for mandamus was the only "adequate means" for the City to seek review of the order, we found that it was "clear that the City cannot challenge the District Court's order by means of an interlocutory appeal." Id. at 933. We noted that "the Supreme Court has recently clarified [that] the collateral order doctrine does not extend to disclosure orders adverse to a claim of privilege." Id., citing Mohawk, 130 S.Ct. at 609 (internal quotation marks omitted). The Supreme Court has made clear that when a court rejects a claim of privilege, the losing party must "pursue other 'avenues of review apart from collateral order appeal,' including, 'in extraordinary circumstances,' a 'petition to the court of appeals for a writ of mandamus.'" Id., quoting Mohawk, 130 S.Ct. at 607 (brackets omitted).

While it is true that both Mohawk and City of New York dealt with claims of common-law evidentiary privilege, and the instant case involves statutorily recognized privacy rights that carry "constitutional overtones," we do not think that difference is sufficient to take the instant case outside of our holding in City of New York. Indeed, while Appellants do not phrase their argument as involving a "privilege," in effect, they seek a finding that Title III makes wiretap materials "privileged" vis-à-vis a civil enforcement agency's discovery request. Moreover, while the claimed "privilege" at issue in the instant case derives from statute, City of New York also dealt with a privilege that was at least partially embodied in statutes. See id. at 941 (noting that the law enforcement privilege "developed at common law from executive privilege," but that it had "been largely incorporated into both New York state and federal statutory law." (footnotes omitted)). In any event, even if City of New York had dealt with a purely common-law privilege, we do not see why the fact that the instant case involves a claimed statutory privacy right would take it outside our holding in City of New York that disclosure orders adverse to a claim of privilege are categorically not immediately reviewable.

For this reason, while there may be arguments in any particular case, as there are in the instant case, that the rejection of a claim of privilege by a discovery order impinges significant interests, there is no interlocutory jurisdiction to review the order.*fn6

II. Is a Writ of Mandamus Appropriate?

Even though we lack interlocutory jurisdiction to review the district court's order, a writ of mandamus may still be appropriate. However, we invoke this "extraordinary remedy" only in "exceptional circumstances amounting to a judicial usurpation of power, or a clear abuse of discretion." Cheney v. U.S. Dist. Court for Dist. of Columbia, 542 U.S. 367, 380 (2004) (citations and internal quotation marks omitted). A writ of mandamus is a "drastic and extraordinary remedy reserved for really extraordinary causes." Id. (internal quotation marks omitted); see also City of New York, 607 F.3d at 943. To issue the writ, three conditions must be satisfied:

(1) "the party seeking issuance of the writ must have no other adequate means to attain the relief it desires"; (2) "the issuing court, in the exercise of its discretion, must be satisfied that the writ is appropriate under the circumstances"; and (3) the petitioner must demonstrate that the "right of issuance of the writ is clear and indisputable."

City of New York, 607 F.3d at 932-33, quoting Cheney, 542 U.S. at 380-81 (brackets omitted).

The writ is appropriate here because no adequate alternative remedies are available, the issue involved is novel and significant and its resolution will aid the administration of justice, and Appellants have shown a "clear and indisputable right" to the writ, because the district court's order undeniably failed to weigh properly the privacy interests at stake against the SEC's right to disclosure. Specifically, the district court failed to ascertain the legality of the wiretaps at issue, a critical factor in determining how to weigh the competing interests. Further, it ordered a wholesale disclosure of the wiretaps without regard to the relevancy of particular recordings, another factor that necessarily informs an assessment of weight.

A. Whether Alternative Remedies are Adequate

Despite the SEC's argument to the contrary, the privacy interests harmed by the disclosure order here could not be adequately remedied on final appeal.

In Bartnicki v. Vopper, 532 U.S. 514 (2001), the Supreme Court noted that the disclosure of the contents of a private conversation can be an even greater intrusion on privacy than the interception itself. As a result, there is a valid independent justification for prohibiting such disclosures by persons who lawfully obtained access to the contents of an illegally intercepted message, even if that ...


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