UPDATE 4-Two main Galleon defendants seek separate trials

* Criminal insider trading trial set for October

* Rajaratnam and Chiesi vow to fight allegations

* Evidence gathered using wiretaps

(Adds comment from Khan’s lawyers)

By Grant McCool

NEW YORK, March 12 (BestGrowthStock) – 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 (HLNQ.PK: ) 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 Oct. 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
[ID:nN08243281].

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
(INTC.O: ) and Galleon, told investigators she obtained the tip
on Hilton from a Moody’s Corp (MCO.N: ) 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.

Investment Research

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

UPDATE 4-Two main Galleon defendants seek separate trials