U.S. prosecutors apparently made the mistake of giving wiretap recordings gathered against Galleon hedge fund insider trading defendants to securities regulators, legal briefs said, potentially compounding a fight over confidential evidence central to the case.

The recordings were returned to prosecutors by the U.S. Securities and Exchange Commission when the mistake was discovered, the office of the Manhattan U.S. Attorney said in a January 27 court filing that was made public on Tuesday.

The SEC, pressing civil charges against Galleon hedge fund founder Raj Rajaratnam and a score of others, demanded in court on January 25 that defendants hand over thousands of recordings of wiretap evidence used to charge them in a parallel criminal case.

But subsequent court filings by prosecutors and a lawyer for indicted former trader Zvi Goffer said the SEC had already been in possession since mid-December of some nonconsensual recordings related to Goffer.

Yesterday, the government learned that, in mid-December 2009, it inadvertently provided the SEC with recordings of certain communications intercepted, said a footnote to the letter brief of January 27 by U.S. prosecutor Jonathan Streeter.

He told presiding U.S. District Court Judge Jed Rakoff that the SEC did not make any copies.

In a separate brief dated January 29 and also made public on Tuesday, Goffer's lawyer Cynthia Monaco said an SEC lawyer told her she was blind-copied on a December 15 email by U.S. prosecutors sending the evidence to lawyers for defendants.

The Office of the U.S. Attorney said in response that prosecutors did not intentionally provide certain wiretap evidence to the SEC or blind copy the SEC on any correspondence.

There is no factual basis for these allegations and they are false, the office said in a letter to the judge.

While the SEC and criminal prosecutors often coordinate with each other, there are limits on the information they can share in parallel civil and criminal cases.

One criminal law professor said he doubted the disclosure in the latest briefs would lead to an exclusory rule being triggered against the wiretap evidence.

Usually it is applied to improprieties in the process of gathering the evidence and not the subsequent use of it, said Peter Henning, a criminal law professor at Wayne State University in Detroit.

JUDGE TO RULE

Criminal prosecutors and the SEC have asked the judge to compel defendants to produce the wiretap evidence in the lead-up to a civil trial scheduled for August 2. The judge is expected to rule this week on those requests.

Rajaratnam's lawyers have argued that the wiretaps, rarely if ever used in white-collar crime investigations, were obtained unlawfully and violated his constitutional rights. They have said they will ask a judge to suppress the recordings as evidence in the criminal action.

Goffer's lawyer, Cynthia Monaco, wrote in her January 29 letter to the judge: The government has turned over sealed wiretap communications without court authorization, leaving them subject to suppression.

She also wrote: The fact that the government blind-copied the SEC suggests the government's understanding of such disclosure was not proper.

As many as 14,000 interceptions of phone calls were made in the investigation involving Wall Street and Silicon Valley firms. Prosecutors described it as the biggest hedge fund insider trading case in the United States.

Goffer, 33, once worked at Galleon and later at the Incremental Capital trading firm and Schottenfeld in New York. The SEC described him as Octopussy, because of the breadth of his sources.

Goffer and six other defendants -- traders and lawyers -- pleaded not guilty on Tuesday to an indictment charging them with securities fraud and conspiracy to commit securities fraud following their arrest on November 5 [ID:nN02241774].

Rajaratnam has also pleaded not guilty. In all, 21 former traders, lawyers and executives have been criminally or civilly charged Eight people have pleaded guilty to criminal charges. Seven of those are cooperating with the probe.

The case is SEC v Galleon Management LP, U.S. District Court for the Southern District of New York No. 09-08811.

(Reporting by Grant McCool, editing by Gerald E. McCormick and Lisa Von Ahn)

Investment Insider trading Raj Rajaratnam