Accused Galleon fund founder Raj Rajaratnam and his main co-defendant want separate trials on charges they were involved in what prosecutors describe as the biggest hedge fund insider-trading case ever in the United States.

Lawyers for Rajaratnam, 52, and former New Castle Funds LLC trader Danielle Chiesi contended in court papers on Friday that allegations of seven distinct conspiracies to commit securities fraud failed to show they could be connected at trial.

Separately, Rajaratnam's lawyers attacked the credibility of former trader and government cooperator Roomy Khan, part of the defense strategy to try to suppress wiretap evidence.

They said Khan, who was previously convicted of insider-trading and who pleaded guilty in the Galleon case, recanted what she told FBI investigators in interviews regarding purchases of Hilton Hotels Corp stock.

Rajaratnam's lawyers said the government knew Khan, was an inveterate fabricator when it filed applications with the court between March and November 2008 to conduct wiretaps.

Not only did the government fail to bring these facts to the court's attention, it claimed in two of the affidavits in support of those applications that Khan has proven to be 'reliable', the Rajaratnam memorandum said.

Khan's lawyer said in response that Rajaratnam's lawyers never seem to address the wiretaps.

The criminal trial of Rajaratnam and Chiesi was scheduled to start on October 25. They were arrested on Oct 16, 2009 and pleaded not guilty to an indictment unsealed two months later. Both are free on bail.

There is an utter lack of meaningful overlap between the seven alleged conspiracies in the case, Rajaratnam's lawyer, John Dowd, said in a memorandum to U.S. District Court Judge Richard Holwell.

A spokeswoman for Manhattan U.S. Attorney Preet Bharara declined comment.

The pair also face trial on civil fraud charges brought by the U.S. Securities and Exchange Commission along with about 20 other former traders, lawyers and executives in a purported network that stretched from Wall Street to Silicon Valley.

Lawyers for Chiesi, 44, made a similar argument for severance of trial.

Jurors would become confused as to which evidence pertained to which conspiracy count and, in turn, which defendant, the lawyers said.

In an interview in February, Chiesi denied she and the Sri Lankan-born Rajaratnam did anything wrong. She said it is an honor and a privilege to stand next to him in court.

In the court papers on Khan, the Galleon founder's lawyers said she preposterously claimed that she purchased Hilton stock shortly before the company was acquired by a private equity firm 'because at the time, Paris Hilton was incarcerated so Khan thought this could be good publicity for the hotel.

The Hilton heiress and socialite served time in Los Angeles County jail in 2007 for violating probation on driving offenses.

In later interviews, Khan, a onetime employee of Intel Corp and Galleon, told investigators she obtained the tip on Hilton from a Moody's Corp analyst Deep Shah, the memo said. Shah is also charged in the case, but remains at large.

Prosecutors have alleged Rajaratnam made $45 million, in profits or avoided losses, from illegal trading based on confidential tips and that Chiesi made $4 million.

Much of the government evidence was gathered using wiretaps and cooperators. Ten out of 21 people charged have pleaded guilty to fraud charges.

Eight of those, some of them Rajaratnam's former friends and business associates or onetime Galleon employees, have signed cooperation agreements with federal prosecutors and may be called to testify.

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

(Reporting by Grant McCool; additional reporting by Jonathan Stempel; editing by Andre Grenon, Leslie Gevirtz)

Raj Rajaratnam