(CN) – Although the SEC has a right to obtain access to thousands of secretly recorded conversations in the Galleon inside-trading case, a federal judge should have waited for a ruling on the legality of the wiretaps before ordering their disclosure, the 2nd Circuit ruled Wednesday.
“While the district court was correct that the SEC has the legitimate right of access of to the wiretap materials, it could not properly balance that interest against the privacy interests at stake while the legality of the wiretaps was still unresolved,” Judge Gerard Lynch wrote for the three-judge panel in Manhattan.
U.S. District Judge Jed Rakoff had issued a sweeping order requiring Galleon founder Raj Rajaratnam, former trader Danielle Chiesi and others to disclose to the SEC the wiretapped conversations that federal prosecutors had provided them in a related criminal case.
Rajaratnam and Chiesi were arrested last October on criminal charges of conspiracy and securities fraud in a case U.S. prosecutors have called the biggest hedge fund inside-trading case in U.S. history.
The use of wiretaps led to criminal or civil charges against 21 people, including Rajaratnam and Chiesi, a former trader at New Castle Partners in New York.
The 2nd Circuit said Rakoff “clearly exceeded [his] 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.”
Judge Lynch acknowledged that federal law “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.”
But Lynch said Rakoff had issued the disclosure order “prior to any ruling on the legality of the interceptions and without limiting the disclosure to relevant conversations.”
SEC spokesman John Nester said the agency was “pleased” with the ruling that the SEC “has a legitimate right to obtain relevant, legally intercepted wiretap materials from defendants prior to their disclosure in criminal proceedings.”