NEW YORK (Reuters) - In a big victory for federal prosecutors, Galleon Group hedge fund founder Raj Rajaratnam lost his bid to suppress secretly recorded conversations from his pending criminal trial on insider-trading charges.

Raj Rajaratnam, the principal in the $21 million Galleon Group hedge-fund insider trading case, leaves Manhattan Federal Court for a bail hearing on conspiracy and securities fraud charges in New York, January 12, 2010. REUTERS/Shannon Stapleton

U.S. District Judge Richard Holwell on Wednesday endorsed the use by prosecutors of wiretaps to investigate a fraudulent insider trading scheme, even though it does not specifically authorize wiretaps to investigate insider trading alone.

He rejected defense arguments that the wiretaps were poisoned because FBI agent B.J. Kang had misled a different judge who authorized them in March 2008 about their need, and were unnecessary because the U.S. Securities and Exchange Commission was pursuing its own civil fraud case without them.

While finding it “troubling” that prosecutors withheld details of the SEC probe, Holwell allowed the wiretaps of more than 2,000 conversations. He said that because much of the alleged scheme was conducted by phone, investigators were unlikely to fully uncover it by conventional means.

“Disclosure of all the details of the SEC’s investigation that the government recklessly omitted would ultimately have shown that a wiretap was necessary and appropriate,” Holwell wrote in his 68-page opinion.

Danielle Chiesi, a co-defendant and former trader with New Castle Funds LLC, had also sought to suppress the wiretaps.

Jim McCarthy, a spokesman for Rajaratnam, declined to comment. Alan Kaufman, a lawyer for Chiesi, declined immediate comment. A spokeswoman for U.S. Attorney Preet Bharara in Manhattan said that office does not discuss ongoing cases.

PRESSURE TO SETTLE?

Rajaratnam and Chiesi face up to 20 years in prison if convicted on charges including securities fraud and conspiracy. A trial is scheduled for January 17.

“The ruling significantly increases the pressure on the defendants to consider whether to plead guilty,” said David Siegal, a partner at Haynes and Boone LLP in New York and a former federal prosecutor.

“Recordings of the precise words spoken by a tipper and tippee in an insider trading case can be powerful evidence to demonstrate criminal intent,” Siegal continued. “Nevertheless, a sentence arising from a guilty plea may be so severe that a defendant may choose to go to trial anyway.”

Holwell ruled on the same day that prosecutors announced the arrest of Don Ching Trang Chu, an executive at the “expert networking” firm Primary Global Research, as part of a widening probe into hedge fund insider trading.

Prosecutors accused Chu of promoting his firm’s services by arranging for leaks of inside information to hedge funds.

A series of new cases against traders, consultants and bankers is expected in the coming weeks, several lawyers familiar with the probe said.

Thomas Engel, a partner at McKool Smith in New York who said he knows Holwell personally, said the judge’s ruling could make it easier to prosecute other insider trading cases.

“It’s a big plus for the government, no question about it,” he said. “It will encourage defendants who may later want to challenge wiretaps to think again.”

CENTRAL FIGURE

The Sri Lankan-born Rajaratnam, once considered a billionaire, had since his October 2009 arrest been the central figure in what prosecutors have described as the biggest U.S. hedge fund insider-trading case ever.

Prosecutors focused on two overlapping networks of people allegedly trading on confidential tips on such companies as Advanced Micro Devices Inc, Google Inc, Hilton Hotels Corp, International Business Machines Corp and Intel Corp.

Rajaratnam and Chiesi made about $53 million in profits from illegal trades, prosecutors have said.

The use of wiretaps was considered novel given that prosecutors had most commonly used them in organized crime and drug cases.

At least two dozen former hedge fund managers, lawyers, traders and others have faced criminal or civil charges in the roughly three-year-old hedge fund insider trading probe.

Fourteen have pleaded guilty to criminal charges, and 11 of them agreed to cooperate with prosecutors. One is at large.

Galleon once managed as much as $7 billion. It began winding down after Rajaratnam’s arrest.

In a separate ruling, Holwell said Rajaratnam and Chiesi could be tried together on some but not all of the charges they face. The defendants, fearing a jury could be confused, asked to be tried separately on some charges they did not both face. Holwell asked lawyers in the case to offer solutions.

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