By Jonathan Stempel and Nate Raymond
(Reuters) - A federal appeals court on Monday upheld the insider trading conviction of Galleon Group hedge fund founder Raj Rajaratnam, rejecting his argument that wiretap evidence was used improperly to convict him.
The unanimous decision by a three-judge panel of the 2nd U.S. Circuit Court of Appeals in New York was a victory for federal prosecutors, who have used wiretaps to win convictions or guilty pleas for 73 defendants in a wide-ranging probe into insider trading that was unveiled in October 2009.
"It does give the government more discretion and makes it easier to secure wiretap applications," said Kevin O'Brien, a former federal prosecutor who is now a partner at Harris, O'Brien, St. Laurent & Houghteling.
Patricia Millett, a lawyer for Rajaratnam, declined to comment. A spokeswoman for U.S. Attorney Preet Bharara in Manhattan declined to comment.
Rajaratnam, 56, is serving an 11-year prison term. A federal jury convicted him in May 2011 of nine counts of securities fraud and five counts of conspiracy.
The government said Rajaratnam, whose firm once managed $7 billion, made as much as $63.8 million in illicit profit from 2003 to March 2009 trading on stocks including eBay Inc
Prosecutors said the Goldman trades included trades during the 2008 financial crisis, just after Rajaratnam got a tip from Goldman director Rajat Gupta of an infusion in the bank from Warren Buffett's Berkshire Hathaway Inc
It was the highest-profile conviction of a hedge fund executive to date in the crackdown on insider trading. Gupta is the highest-ranking corporate executive convicted, and is appealing his June 2012 conviction and two-year prison sentence.
As part of the probe, investigators relied heavily on wiretaps, a tool that until then was more often associated with mafia prosecutions.
In March 2008, prosecutors sought to wiretap Rajaratnam's cell phone in a bid to identify his network of inside sources and gather evidence for criminal cases.
The wiretaps were also at the center the case against Gupta, the former head of management consultancy McKinsey & Co who prosecutors say gave Rajaratnam inside information about Goldman Sachs Group Inc, where Gupta was a board member.
Rajaratnam's lawyers had argued the recordings should have been suppressed because the initial wiretap application contained misstatements or omissions.
The 2nd Circuit rejected those arguments. U.S. Circuit Judge Jose Cabranes, writing for the court, said details Rajaratnam said "all of the alleged misstatements and omissions were not 'material.'"
Cabranes also rejected Rajaratnam's argument that former U.S. District Judge Richard Holwell's jury instructions on the use of inside information were erroneous.
O'Brien, who is not involved in the case, said Monday's decision "gives the government comfort when making applications of this kind that they don't have to turn square corners as long as any mistakes or omissions are not deemed material end day."
The case is U.S. v. Rajaratnam, 2nd U.S. Circuit Court of Appeals, No. 11-4416.
(Reporting by Jonathan Stempel in New York; Editing by Gerald E. McCormick, Jeffrey Benkoe and David Gregorio)