NEW YORK - A U.S. grand jury on Tuesday indicted Galleon hedge fund founder Raj Rajaratnam and co-defendant Danielle Chiesi on charges of securities fraud and conspiracy in an insider trading case involving employees of some of America's best-known companies.

The indictment in Manhattan federal court, two months after the pair were charged along with others in a coast-to-coast probe on October 16, lists 17 counts of conspiracy to commit securities fraud and securities fraud.

Sri Lankan-born Rajaratnam and Chiesi, who worked with New Castle LLC hedge fund, are the only indictments returned so far in the case, which expanded in November to include 20 people facing criminal and civil charges.

The billionaire Rajaratnam, a U.S. citizen who is free on $100 million bail, is the most prominent figure in what U.S. prosecutors described as the biggest hedge fund insider trading case ever. The government said investigators used wire taps, tactics historically used in organized crime probes, to gather evidence.

Rajaratnam's lawyer has consistently said he would fight the charges.

Mr Rajaratnam is innocent and looks forward to his day in court when a jury of his fellow citizens will examine and evaluate all of the evidence, Rajaratnam's lawyer, John Dowd, said in a statement after the indictment was returned.

Chiesi's lawyer Alan Kaufman said the indictment did not contain any new allegations from those made in October when she was arrested on insider trading charges.

We intend to appear in court, plead not guilty and we will vigorously fight the case, Kaufman said.

The two accused were expected to appear in Manhattan federal court on Monday, their lawyers and the office of the U.S. Attorney said.

Most of the accused had expertise in tech stocks, and the allegations included passing inside information on earnings announcements, takeovers and contracts on 10 companies, generating more than $30 million in illegal profits, according to prosecutors. They alleged that Rajaratnam and Chiesi made $20.8 million in illegal profits.

Six traders or lawyers have pleaded guilty to charges in the investigation, which ensnared employees of IBM Corp, McKinsey & Co management and former lawyers of the Ropes & Gray law firm.

In the overall case, inside trading allegedly took place in shares of Google, Sun MicroSystems, Advanced Micro Devices, Polycom, Hilton Hotels, Intel, Clearwire, Akamai, Atheros and IBM, among others.

The indictment charged Rajaratnam and Chiesi with participating from July 2008 to October 2008 in a scheme to defraud by disclosing inside information and executing securities transactions in Akamai Technologies and AMD.

Chiesi got the information from an Akamai employee and she and Rajaratnam got the information from several AMD sources. Chiesi told Rajaratnam the information about Akamai while they provided each other information about AMD. Galleon Technology Funds earned about $3.5 million profit from the scheme, according to allegations in the indictment.

Rajaratnam sold 138,5000 shares of Akamai common stock short on or about July 25, 2008 after getting a call from Chiesi.

Chiesi got inside information about AMD, Akamai, IBM, Sun Microsystems and other companies from the Akamai source and from a co-conspirator from July, 2008 to April 2009.

The cases are USA v Raj Rajaratnam et al, U.S. District Court for the Southern District of New York, No. 09-mj-2306 and USA v Danielle Chiesi 09-mj-2307 in the same court.

(Reporting by Grant McCool; additional reporting by Svea Herbst-Bayliss; editing by Gary Hill and Andre Grenon)

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