A former Galleon Group trader contends he saw the brother of accused hedge fund founder Raj Rajaratnam remove notebooks from their office on the day of Rajaratnam's October 2009 arrest, according to trial documents.

Lawyers for Rajaratnam, the central figure in the biggest insider trading case in a generation, asked the trial judge in court papers to preclude prosecutors from questioning former trader Adam Smith about the documents. Smith is expected to testify against his old boss as a government witness.

In response, federal prosecutors argued that Smith's observations are being offered to prove the existence of the charged conspiracy and were not prejudicial to the man on trial.

The weekend court filings said that when Smith was interviewed by the FBI on February 1, he claimed Rengan Rajaratnam spoke to him about the removal of the documents some time later in a manner in which Smith interpreted to mean that 'Rengan wanted to confirm (Smith) was not going to say anything about the notebooks.'

Smith has pleaded guilty in the case along with nearly a score of other former traders, executives and lawyers. He could testify at Raj Rajaratnam's trial in Manhattan federal court as soon as this week. Rengan Rajaratnam, also a fund manager, is an unindicted co-conspirator.

Raj Rajaratnam's lawyers said in the court filing that the documents retrieved by Rengan Rajaratnam reflected Raj's Rajaratnam's charitable donations and real property holdings on the instructions of counsel for his brother's bail hearing on October 16, 2009.

Sri Lankan-born Rajaratnam, 53, is accused of running a network of highly-placed friends and associates to give him inside tips about earnings or merger activity at companies such as Google Inc Intel Corp and Goldman Sachs Group Inc between 2003 and 2009.

Prosecutors have charged 26 people in the Galleon probe. The case is particularly notable because of the government's wide-scale use of telephone taps, dozens of which have already been played to the jury since the trial opened on March 9.

On Monday, former Intel executive Rajiv Goel resumed testimony under cross-examination. He is among 19 people who have pleaded guilty in the case.

Goel, under questioning from defense lawyer Terence Lynam, acknowledged some information he gave Rajaratnam in 2007 and 2008 may have been inaccurate or had already been subject to press or analysts' speculation.

Whatever I had I passed on to him, Indian-born Goel, 52, told the jury. I don't know whether it was right or not.

Rajaratnam's defense is that his trades were based on his own research and publicly available information. He has vowed to clear his name at trial.

The case is USA v Raj Rajaratnam et al, U.S. District Court for the Southern District of New York, No. 09-01184.

(Reporting by Grant McCool; editing by Andre Grenon)

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