UPDATE 1-Galleon's Rajaratnam urges judge to scrap wiretaps

* Rajaratnam wants wiretap evidence excluded

* Prosecutor says no subterfuge

* Insider trading trial postponed three months to Jan. 17 (Adds details from hearing; new trial date)

By Jonathan Stempel

NEW YORK, July 27 (Reuters) - Lawyers for Raj Rajaratnam, the Galleon Group hedge fund founder accused of illegal insider trading, urged a judge on Tuesday to throw out wiretap evidence at his upcoming trial they say was illegally obtained.

In a courtroom filled with about 90 people, Rajaratnam sat impassively as his lawyers told U.S. District Judge Richard Holwell the government had no probable cause to obtain wiretaps, starting with one authorized by a different federal judge in March 2008.

By allowing wiretap evidence, "it would signal that the government can cut corners in an area where Congress has specifically legislated," said Terence Lynam, a lawyer for Rajaratnam.

Prosecutors from the U.S. Attorney's Office in Manhattan countered at the 4-1/2-hour hearing that, while the government has often used wiretaps in organized crime and drug trafficking cases, their use against Rajaratnam was also legal.

They also argued that insider trading can fall within the definition of wire fraud, where wiretaps can be used.

"Mr. Rajaratnam's argument that there is some kind of subterfuge here belies common sense," argued Assistant U.S. Attorney Reed Brodsky.

NEW TRIAL DATE

Rajaratnam, 53, is trying to suppress cellphone conversations that prosecutors hope to introduce at his criminal trial. He has pleaded not guilty in the case.

He and co-defendant Danielle Chiesi, a 44-year-old former portfolio manager at New Castle Group LLC, are the central figures in a sprawling insider trading case in which 12 out of the 21 executives, lawyers, portfolio managers and traders who have been charged have entered guilty pleas.

Prosecutors have accused Rajaratnam of using tips about earnings and transactions from executives and hedge fund officials to make $45 million in illegal trading profits on stocks including Google Inc (GOOG.O) and Intel Corp (INTC.O).

Chiesi, who also has pleaded not guilty, made about $4 million, prosecutors said.

Holwell said he would rule "shortly" on the admissibility of the wiretap evidence.

He also delayed the start of the trial to Jan. 17 from Oct. 25, after both sides said more preparation was needed.

The new date, however, could bump up against a Feb. 14, 2011 trial date in a U.S. Securities and Exchange Commission civil fraud lawsuit against both defendants and others before a different Manhattan federal judge, Jed Rakoff.

DEFENSE SAYS FBI AGENT MISLED A JUDGE

Rajaratnam's lawyers argued that B.J. Kang, an FBI special agent, misled a judge when seeking a wiretap authorization.

Kang relied heavily on an informant, former Rajaratnam associate Roomy Khan, who was convicted of fraud and could not be trusted, defense lawyers said.

Such information constitutes "facts that any reasonable judge would want to know" before allowing a wiretap, argued John Dowd, another lawyer for Rajaratnam.

The defense also argued that use of wiretaps cannot be reconciled with the SEC's use of "conventional" investigative techniques -- such as interviews, subpoenas and on-site examinations -- before it filed its own civil charges concerning the same alleged wrongdoing.

"Conventional techniques work," Lynam said.

Chiesi's lawyer, Alan Kaufman, separately argued that the government was too quick to use wiretaps on his client.

"You cannot conduct a legitimate insider trading investigation in two weeks" before resorting to wiretaps, he said.

Prosecutors argued that the wiretaps should be admissible by noting that six different federal judges authorized them.

Once considered a billionaire, the Sri Lankan-born Rajaratnam once oversaw $7 billion, but has been winding down his hedge fund firm. He could face as much as 20 years in prison if convicted. Chiesi also could get a 20-year term.

If the wiretap evidence were excluded, prosecutors could still call several cooperating witnesses to testify against Rajaratnam, including former friends and business associates.

The case is U.S. v. Rajaratnam et al, U.S. District Court, Southern District of New York, No. 09-01184. (Reporting by Jonathan Stempel in New York; editing by Andre Grenon)