Hedge fund trader: No probation, I'll risk prison

* Kimelman sure of innocence, risks 45 years prison

* Defendant says no to offer of probation

By Jonathan Stempel

NEW YORK, May 10 (Reuters) - A defendant in the U.S. government's broad hedge fund insider-trading case is so sure of his innocence that he turned down probation and is prepared to risk a trial that could put him in prison for 45 years.

A lawyers for former trader Michael Kimelman, who faces a trial starting May 16 in New York, said prosecutors as recently as last week offered his client a chance to plead guilty to conspiracy to commit securities fraud.

In exchange, he would be sentenced to probation, with no prison time and securities fraud charges would be dropped.

Kimelman said no.

"Mr. Kimelman's decision to decline a non-jail sentence, persist in his plea of not guilty, and face the possibility of a sentence of imprisonment if convicted at trial is probative of a state of mind devoid of guilty knowledge," Michael Sommer, his defense lawyer, wrote in papers filed in Manhattan federal court on Monday.

"It bears emphasizing that Mr. Kimelman did not just reject a plea agreement. He rejected a non-jail sentence," Sommer added, italicizing the last four words.

A spokeswoman for U.S. Attorney Preet Bharara in New York declined to comment. Sommer was not immediately available to comment. Sommer hopes to introduce details about the rejected plea agreement at trial. He said prosecutors oppose this.

Twenty-one of 26 defendants charged in the original hedge fund insider trading probe, unveiled in October 2009, have pleaded guilty.

Galleon Group founder Raj Rajaratnam pleaded not guilty and his jury is in its third week of deliberations. Kimelman's co-defendants, the brothers Zvi and Emanuel Goffer, also pleaded not guilty. The 26th defendant is at large.

The case against Kimelman and the Goffers focuses on alleged trading on tips about computer network equipment maker 3Com Corp and Canadian drug company Axcan Pharma Inc.

Prosectors said Kimelman bought 20,000 shares of 3Com in August and September 2007 before private equity firm Bain Capital Partners LP and China's Huawei Technologies Co Ltd [HWT.UL] agreed to buy that company.

The merger later fell through and 3Com was bought last year by Hewlett-Packard Co (HPQ.N).

Cohorts of Zvi Goffer, a former trader at Galleon, referred to him as "Octopussy," the title of a 1983 James Bond movie, because he was said to have many sources of information, prosecutors said.

The case is U.S. v. Goffer et al, U.S. District Court, Southern District of New York, No. 10-cr-00056. (Reporting by Jonathan Stempel in New York; editing by Andre Grenon)