NEW YORK, March 17 (Reuters Legal) - In the ongoing insider-trading trial of Raj Rajaratnam, the government is firing some potent missiles from its arsenal of 2,400 taped phone conversations. But in a related case, a federal judge recently rebuked investigators for their handling of a wiretap, showing this powerful tool can open the government to uncomfortable legal challenges.

In the related case, prosecutors charged Craig Drimal, a former trader at the Galleon Group hedge fund, and 13 other Wall Street professionals with insider trading that allegedly generated more than $20 million in illegal profits. The case grew out of the same investigation that led to charges against Rajaratnam, the founder of the Galleon Group, who is accused of pocketing more than $40 million based on tips he received from a network of sources.

In both cases, the defendants have contested the use of wiretaps, which are more often deployed against organized crime than in white-collar investigations. While the judge in the Drimal case has indicated he is unlikely to suppress those wiretaps, he directed some harsh words at prosecutors and investigators.

I don't think that there was any question that at least a couple of the calls here were disgraceful and should not have been monitored the way they were, Judge Richard Sullivan said, according to a transcript reviewed by Reuters Legal. It is an embarrassment to the FBI. It is an embarrassment generally. It should not happen.

Sullivan, of the Southern District of New York, was speaking at a hearing he called last week to consider a motion by Drimal's attorney, JaneAnne Murray, to suppress the wiretap evidence because the government had listened to personal conversations between Drimal and his wife.

The appropriate sanction, Murray argued, would be to suppress a month's worth of calls. But Judge Sullivan cautioned that he may not grant the motion. In fact, the case law suggests that suppression is a pretty hard remedy to get these days -- or ever, he said.

Judge Sullivan had previously denied a motion by Drimal and four of his co-defendants to suppress wiretaps on other grounds.

FBI LISTENED TO INTENSELY PERSONAL CALLS

The legality of wiretap evidence has already surfaced in the Rajaratnam case. Last year, federal Judge Richard Holwell of the Southern District of New York held a four-day evidentiary hearing to evaluate claims by Rajaratnam's lawyers that the government had not been truthful in its wiretap application. In a decision in November, Judge Holwell found that the government had left out key facts in its application, but concluded the omissions were not reason enough to suppress the wiretaps.

If Rajaratnam is found guilty, his lawyers may try to revive the wiretap issue on appeal. In order to be successful, they would have to show that Judge Holwell abused his discretion on his findings of fact, something that defense lawyers said was unlikely.

You have to go way off the deep end for the appellate court to overrule you, said Daniel Ruzumna, a white-collar defense attorney at Patterson Belknap Webb & Tyler.

In the Drimal case, defense attorney Murray wrote in her motion to dismiss that some of the calls between Drimal and his wife were of an intensely personal nature that are particularly painful for the Drimals to know have been overheard. She argued that under Title III, the federal statute that authorizes wiretaps, the government had an obligation to stop listening to Drimal's calls once it became clear that he was speaking with his wife, who was not believed to have been involved in illegal trading.

Some of the calls were played while the participants at the hearing, including Judge Sullivan, listened with headphones. After listening to one of the calls, Judge Sullivan asked FBI Special Agent Frank Lomonaco if it was appropriate for the bureau to listen to a call of that nature for that length of time?

Knowing what I know now, no, said Lomonaco. The government did not dispute that some calls picked up by the Drimal wiretap were not relevant to its investigation. Michael Levy, Assistant U.S. Attorney for the Southern District of New York, said at the hearing that the government was not trying to convince Judge Sullivan that some of these the calls were OK, because they weren't.

Judge Sullivan gave both sides until Friday to submit additional briefs on the issue. Drimal and four of his codefendants are scheduled to go to trial in May.

(Reporting by Andrew Longstreth of Reuters Legal; Editing by Eddie Evans and Eric Effron)

Insider trading Raj Rajaratnam