Galleon hedge fund founder Raj Rajaratnam, accused of fraud and conspiracy in a complex insider trading case, attacked the U.S. government's wiretap evidence on Tuesday, as he won approval to stay free on bail.

Rajaratnam's lawyer John Dowd told a New York judge that he would file a motion to suppress telephone recordings used to arrest his client last October and more than a dozen other people in what prosecutors have called the biggest hedge fund insider trading case ever in the United States.

The recordings were cherry picked and mismanaged and someone did not do their homework, Dowd told U.S. District Court Judge Richard Holwell at a bail hearing, with Rajaratnam by his side.

The judge ruled that Rajaratnam, 52, could remain free on $100 million bail while awaiting trial on insider trading charges. But he rejected Rajaratnam's request to reduce bail to $20 million. Prosecutors had asked the judge to revoke bail.

Prosecutors signaled last week that they were going to file new charges against Sri Lankan-born Rajaratnam. Dowd told the court on Tuesday that Rajaratnam would plead not guilty to any new charges. As far as we are concerned, these are false accusations and we will deal with it like the other accusations, Dowd said.

Rajaratnam is the most prominent defendant among 21 people criminally or civilly charged in an insider trading case involving employees of some of America's best-known companies, including International Business Machines Corp , McKinsey & Co and Intel Capital, an arm of Intel Corp .

Rajaratnam and Danielle Chiesi, a former employee of New Castle Funds LLC, are the only two defendants indicted so far. Seven people, including a former director of McKinsey & Co management consultants, have pleaded guilty to charges of fraud and conspiracy.

The former McKinsey employee, Anil Kumar, pleaded guilty last week, saying Rajaratnam paid him $1.75 million for inside information over several years, including tips on deals by Advanced Micro Devices Inc before they became public.

Dowd said in court on Tuesday that he would prove that Kumar had lied.

U.S. prosecutor Josh Klein told the court that Rajaratnam's alleged illegal profits may have been as much as $41 million or more, at least $5 million more than previously alleged.

He said that three cooperating witnesses had admitted to conspiring with Rajaratnam.

The cases are USA v Raj Rajaratnam et al, U.S. District Court for the Southern District of New York, No. 09-01184 and USA v Zvi Goffer et al in the same court, 09-mj-02438

(Reporting by Grant McCool; Editing by Toni Reinhold)

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