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Cell Phone Records Help Uncover Vast Insider-Trading Ring

“I’m dead if this leaks. I really am…and my career is over. I’ll be like Martha f…..g Stewart.”

–Defendant Danielle Chiesi to an unnamed alleged co-conspirator.

The Background
The biggest insider-trading ring in a generation is what federal authorities are calling a huge conspiracy in which hedge-fund kingpin Raj Rajaratnam appears to be at the center. The cover of last Saturday’s Wall Street Journal featured Raj doing the “Perp Walk” in handcuffs after being arrested for allegedly conspiring with insiders at IBM and Intel to profit from illegal gains….bringing back memories of the 1980’s Ivan Boesky scam.

The Allegations
Insiders, including executives at McKinsey & Co., and New Castle Partners, are accused of harvesting inside information about deals and company performance and trading on that news in advance of public release. Raj Rajaratnam is the founder of Galleon Group, a New Yorkbased fund firm that manages $3.7 billion, has been arrested by the FBI and charged with securities fraud, along with 5 other codefendants at IBM, Intel, New Castle, and McKinsey.

The Result
So paranoid were the alleged co-conspirators that they actually discussed the danger of documenting their crimes in cell phone conversations. In one conversation between two of the alleged fraudsters…
“Don’t put anything in email…Don’t email even Raj.”

The result? Feds resorted to some “old school” investigative tactics and tapped the defendant’s cell phone conversations after receiving tips regarding alleged inappropriate trading activity. Rajaratnam and his colleagues now face charges they collected $20 Million in fraudulent
profits.

The Take-Aways

  1. Never assume the defendants are too smart to leave behind a digital record of their misdeeds. This case once again illustrates how brilliant people apparently engaged in reckless behavior often leave a digital trail a mile wide. Don’t make the unfortunate mistake of not going after Electronically Stored Information (ESI) because you think the bad guys were too clever to create digital fingerprints.
  2. Cell Phone / voice mail records are now digitally stored. Voicemail records are now routinely stored as digital files on telephone system computer servers. These records are discoverable and can be searched and produced during investigations or discovery. Remember to preserve (or target) this electronic evidence in cases in which you believe such ESI might exist.
  3. Got a tip? Preserve ESI. The massive fraud alleged in this case appears to have come to light because of a tip from an “unnamed cooperating witness” that used to work with Mr. Rajaratnam. Corporate attorneys and internal investigators should always treat these tips with respect, and should act quickly to preserve ESI, particularly in our age of mandatory reporting, the “Red Flags Rule”, and other regulations requiring a duty to investigate. Sometimes you only have one opportunity to preserve critical electronic evidence before it disappears.
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About Jeff Hartman

Jeff is a 30 year veteran of the corporate security, computer forensics, and eDiscovery community and a co-founder and partner at 4Discovery. 4Discovery is a leading provider of computer incident response and computer forensics services to attorneys, corporate security executives, and the information protection community.