UPDATE 1-Rajaratnam loses bid to avoid prison during appeal

Thu Dec 1, 2011 4:44pm EST

* Galleon founder wanted bail while contesting conviction

* Rajaratnam set to begin serving 11-year term on Dec. 5

By Jonathan Stempel

Dec 1 (Reuters) - Raj Rajaratnam, the Galleon Group hedge fund founder, lost his bid on Thursday to stay out of prison while he appeals his conviction in the biggest insider trading case in a generation.

The 2nd U.S. Circuit Court of Appeals in New York issued a brief order rejecting Rajaratnam's bid to remain free on bail, one day after hearing arguments from his lawyers.

He has been under house arrest at his Manhattan apartment since his May 11 conviction.

Rajaratnam, who did not attend Wednesday's hearing, is scheduled on Monday to begin serving an 11-year prison term, the longest on record for insider trading.

He would report to the Federal Medical Center Devens in Ayer, Massachusetts, about 40 miles west of Boston, people familiar with the matter said. The people declined to be named because the location has not been made public.

Rajaratnam is challenging his conviction, saying wiretap evidence should not have been admitted at his two-month trial.

Patricia Millett, a lawyer who argued Rajaratnam's appeal, did not immediately return a call seeking comment. A spokeswoman for U.S. Attorney Preet Bharara in New York declined to comment.

The 2nd Circuit did not explain its decision.

At oral argument, judges had questioned whether the Sri Lankan-born Rajaratnam was a flight risk. He has dual citizenship in the United States and Sri Lanka, but has lived most of his life in the United States.

A Manhattan federal jury convicted Rajaratnam of all 14 counts he faced. The government case was bolstered by trial judge Richard Holwell's decision to admit wiretapped phone calls, more commonly used in organized crime and drug cases.

Rajaratnam claimed an FBI agent improperly omitted information when seeking another judge's approval in March 2008 for the wiretaps.

He said this violated his constitutional rights and a requirement the government show the wiretaps were needed, and could lead to a reversal of his conviction.

The appeals process could take one year or more.

Rajaratnam, whose firm once managed $7 billion, is the central figure in a broad federal crackdown on insider trading that has led to roughly 50 convictions and guilty pleas.

Former Goldman Sachs Group Inc director Rajat Gupta, a former chief of consulting firm McKinsey & Co, has also been charged for leaking tips to Rajaratnam, his longtime friend. Gupta is fighting those charges.

The 11-year prison term is shorter than the 19-1/2 to 24-1/2 years that prosecutors sought. In imposing the sentence, Holwell said Rajaratnam had health concerns and faced imminent kidney failure from advanced diabetes.

The case is U.S. v Rajaratnam, 2nd U.S. Circuit Court of Appeals, No. 11-4416.

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