A federal appeals court ruled against the SEC, which is trying to get wiretaps from the criminal prosecution of Raj Rajaratnam, the founder of the Galleon Group hedge fund.  Prosecutors in the criminal case provided the recordings to Mr. Rajaratnam and Ms. Chiesi during discovery proceedings, and the SEC had wanted to use them as evidence in its civil insider-trading case.

But the 3 judges on the U.S. Court of Appeals for the Second Circuit overturned an order from Judge Jed Rakoff, of Federal District Court in Manhattan, that would have compelled Mr. Rajaratnam and a co-defendant, Danielle Chiesi, to give the commission the wiretapped recordings of hundreds of their conversations.  The judges reasoned that the federal judge in the criminal case, Richard Holwell, has yet to rule on whether the wiretaps were legally obtained - he plans to hold a hearing on Monday on this matter - and that Judge Rakoff should have waited on a ruling in the criminal case.

    Rebuke to Judge Rakoff.   In its ruling, the appeals court acknowledged that Judge Rakoff “correctly found that the SEC had a legitimate right of access” to the wiretaps, but added that the judge “clearly exceeded” his discretion in finding that the commission’s right to the wiretaps “outweighed the privacy interests” of the defendants while the legality of the wiretaps was still being challenged.  The ruling also criticized Judge Rakoff’s decision to schedule the civil trial ahead of the criminal prosecution of Mr. Rajaratnam and Ms. Chiesi.

“The more prudent course in the instant case may have been to adjourn the civil trial until after the criminal trial."

“Apparently, all the parties agreed to such a request, yet the district court declined to grant it. Were the civil trial adjourned, the most relevant wiretapped conversations, assuming they were found to be legally intercepted, might well be publicly disclosed at the criminal trial, and the SEC would then be able to use these materials in a civil proceeding without implicating any weighty privacy rights.”

Mr. Rajaratnam and Ms. Chiesi were indicted in December 2009 on charges of securities fraud and conspiracy in what prosecutors have called the biggest hedge fund insider-trading case in the United States.  Several other defendants in the criminal case have already pleaded guilty.

And so, the civil case was sent back to Judge Rakoff.   [NYTimes, 9/30]