Lawyers for Galleon hedge fund founder Raj Rajaratnam called two witnesses at his insider trading trial on Monday in an effort to undermine the credibility of a former employee who testified against him.

Rajaratnam's defense opened its side of the case for New York jurors who have heard five weeks of prosecution evidence, including dozens of FBI phone taps and testimony of three cooperating witnesses.

The first defense witness, Polaris Investment Partners Inc hedge fund owner John Pernell, described a conversation with one of the cooperating witnesses, former Galleon portfolio manager Adam Smith. He called Smith a dear friend.

Pernell said Smith, who pleaded guilty in January to conspiracy and fraud charges related to insider trading at Galleon, met him for breakfast in February to discuss Smith's plea agreement with prosecutors.

Pernell testified in Manhattan federal court that while that plea agreement included five transactions involving trading on inside tips, Smith told him in actuality three or four trades were not made based on confidential information.

Prosecutors have told the jury that Rajaratnam cheated to gain an unfair advantage in the stock market between 2003 and March 2009, reaping an illicit $63.8 million for his hedge fund.

Through cross-examination and hearings, the defense had previewed its mosaic theory of stock trading -- Rajaratnam's trades were based on a collection of research, analysis and public information, not corporate secrets whispered to him by high-placed insiders.

On Monday, the defense also called Robert Hotz, a colleague at law firm Akin Gump Strauss Hauer & Feld LLP who had interviewed Smith last year. Hotz testified that Smith told him he was not aware of any insider trading at Galleon and Rajaratnam directed him to explore analysis and themes in his trading.

The defense team has not disclosed whether one-time billionaire Rajaratnam, 53, will testify to tell his side of the story in the biggest Wall Street insider trading case in decades. If he did, it would be a rare instance of a high-profile defendant testifying and could open him to the possibility of a devastating cross-examination by prosecutors.

Rajaratnam's lawyers said they plan to call five witnesses over two days. Other witnesses include former Galleon chief operating officer Rick Schutte and one-time Galleon analyst Stephen Granoff. University of Rochester business professor Gregg Jarrell is expected to give expert testimony on trading.

The jury could hear closing statements from both sides later in the week.

The burden of proof is on the government to convince the jury that Rajaratnam received company secrets from someone who had a fiduciary duty not to disclose them and that Rajaratnam knew it was wrong.

The Sri Lanka-born Rajaratnam, who faces up to 20 years in prison if convicted, has sat silently in court since his trial began on March 8, occasionally writing notes on a legal pad.

He has been free on bail since his October 2009 arrest on charges related to trades in companies such as search engine Google Inc chipmaker Advanced Micro Devices Inc and online auction site eBay Inc.

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

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