Galleon Group hedge fund founder Raj Rajaratnam is making an all-out legal assault to get the first wiretaps used in a widespread probe of insider trading on Wall Street thrown out, but legal experts doubt the defendant will succeed.

A New York judge will hear the arguments over wiretap evidence on Tuesday in what could be a turning point in the federal prosecution of the Sri Lankan-born money manager and principal co-defendant Danielle Chiesi. The two are set to go on trial in October.

The prosecution would suffer a huge blow if Rajaratnam, 53, and former New Castle Funds trader Chiesi, 44, win their bid to suppress the secret recordings amassed by U.S. investigators.

If U.S. District Judge Richard Holwell rules in favor of the government, however, a jury would hear potentially damaging evidence culled from the interception of Rajaratnam and Chiesi's cellphones.

There is no doubt in my mind that (the motion to suppress wiretaps) is going to be denied, Fordham University law professor James Cohen said. You won't find a thing in the legislative history of the wiretap statute that suggests the stock markets or insider trading was off-limits.

Wiretaps historically have been used in investigations of organized crime groups and drug trafficking. Their use in the Galleon probe, which ensnared corporate executives, traders and lawyers accused of swapping inside information about a slew of stocks, is seen as a significant expansion by the government.

It is hard to knock out a wiretap because judges don't read these narrowly or technically, said Peter Henning, a criminal law professor at Wayne State University in Detroit.

Rajaratnam and Chiesi both face as many as 20 years in prison if convicted of participating in a far-reaching insider trading ring.

The government estimates that Rajaratnam made about $45 million in illegal profits and Chiesi $4 million from the purported scheme. Prosecutors said they and others traded shares of IBM Corp, Google Inc, Intel Corp and other companies after being tipped off about upcoming earnings and deals.

THOUSANDS OF RECORDINGS

Rajaratnam's legal team argues the FBI misled judges to improperly obtain their permission to record thousands of communications.

In one example in court papers, the lawyers say the government failed to disclose that Rajaratnam's former friend and associate, Roomy Khan, a convicted felon who went on to plead guilty in the Galleon prosecution, was an unreliable witness.

One brief urged Holwell to issue a clear ruling that the government must be fully candid when seeking a wiretap.

Rajaratnam's lawyers also say the interceptions violated privacy rights and Congress did not intend wiretap statutes to apply to insider trading probes.

Prosecutors countered in court papers that FBI affidavits did not leave out details and said wiretaps were appropriate because insider trading requires a communication and is often difficult to detect and to prove beyond a reasonable doubt.

In the prosecution of purportedly intertwined networks of tippers and tippees that shook the hedge fund world last October and November, 12 out of 21 defendants -- faced with wiretap and other evidence -- have pleaded guilty.

If the wiretap evidence were to be excluded, prosecutors would still have several cooperating witnesses to testify at Rajaratnam's trial, including former friends and business associates.

Added to that is the knowledge on both sides that 92 percent of U.S. fraud prosecutions ended in convictions or guilty pleas in 2009, according to federal court statistics.

Rajaratnam's chief counsel, John Dowd, declined to comment, as did Chiesi's lawyer, Alan Kaufman.

CONSTITUTIONAL CONCERN

Six different judges authorized the interception of Rajaratnam's cellphone from 2007 to 2009, prosecutors said. The overall investigation lasted at least six years.

Whole pages and paragraphs of the public court record are blacked out, apparently because they refer to secretly taped conversations that remain under seal.

Lawyers for Rajaratnam and Chiesi have focused on the strict rules for tapping phones under a statute known as Title III of the Omnibus Crime Control and Safe Streets Act of 1968.

There are constitutional concerns when wiretap evidence is used in new ways, said David Feldman, a white-collar lawyer at Nixon Peabody LLC in New York who is not involved in the case.

But just because it hasn't been used in a particular way before does not mean automatically that it is not covered by the existing laws and existing statutes, he said.

The defense lawyers are also fighting to keep the recordings out of the hands of the U.S. Securities and Exchange Commission, which does not automatically have the right to share such criminal evidence. The SEC sued the defendants and their firms for civil fraud.

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

(Reporting by Grant McCool; Editing by Lisa Von Ahn)

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