Galleon U.S. witness was taping calls for months

Galleon hedge fund partner Raj Rajaratnam (C) is escorted by FBI agents after being taken into custody in New York October 16, 2009.

NEW YORK (Reuters) - A former hedge fund manager who is a key cooperating witness in the Galleon insider-trading probe was "consensually recording phone calls" with potential suspects until a week before authorities arrested Galleon head Raj Rajaratnam, according to a recently unsealed court filing.

The document suggests federal authorities had wanted to keep working with Richard Choo-Beng Lee in some "covert" fashion for quite some time -- possibly even weeks or months after the October 16 arrest of Rajaratnam and five other people.

But it appears any plan by federal prosecutors to continue using Lee to record phone calls with potential suspects ended a few days after Rajaratnam's arrest. That is when the Wall Street Journal reported that the former co-manager of Spherix Capital and a one-time tech analyst for SAC Capital Advisors was cooperating with the investigation.

Separately on Thursday, a New York lawyer became the sixth person to admit to conspiring with others in the Galleon case.

Federal prosecutors in New York filed the previously sealed court document in advance of Lee's October 13 guilty plea to explain to the presiding judge why the proceedings should be kept out of the public spotlight.

But the recently unsealed filing sheds some new light on the extent of Lee's cooperation and just how pivotal he might be to the prosecution's case and the ongoing investigation.

The document reports that Lee began cooperating with the nearly two-year-old investigation on April 8, after he was contacted by a Federal Bureau of Investigation agent.

PHONE CALLS TO SOURCES

The identify of the FBI agent isn't disclosed in the court filing, which was unsealed by a federal judge on November 16. But sources familiar with the case have confirmed the agent is B.J. Kang, the investigator heading up the biggest insider-trading case in two decades.

Lee's cooperation began shortly after he and Spherix's other co-founder, Ali Far, abruptly closed their 18-month-old San Jose, California-based fund.

Since April 8, the court filing said Lee had met with federal authorities numerous times, providing them with "information concerning the criminal activities of his former associates and co-conspirators."

Additionally, the filing said authorities were able to corroborate Lee's admissions with "phone calls placed by the defendant to certain of his sources of inside information that were consensually recorded by the defendant."

A spokeswoman for U.S. Attorney Preet Bharara in Manhattan declined to comment. Lee's lawyer, Jeffrey Bornstein, said his client continues to cooperate with the investigation.

Federal prosecutors officially confirmed that Lee was cooperating with the investigation on November 5. On that day, authorities filed criminal charges against 14 other people, including Lee.

Prosecutors also released a copy of Lee's cooperation agreement, which he signed on October 8.

In that document, Lee agreed to not only testify about his misdeeds at Spherix, but to provide prosecutors with any evidence of alleged insider trading in which he may have engaged at SAC and another hedge fund, Stratix Capital Management. Two former SAC alums founded Stratix, which is now defunct.

(Reporting by Matthew Goldstein, editing by Gerald E. McCormick)