Counsel for Raj Rajaratnam made a plea to keep him out of prison yesterday, arguing he should remain free on bail because he has a real shot of having his insider trading convictions vacated by the U.S. Court of Appeals for the Second Circuit.

Five days before the Galleon Group hedge fund founder is set to begin serving an 11-year prison sentence, attorney Patricia A. Millett told the Second Circuit that the prosecution should pay the price for omitting from its wiretap warrant application in 2008 that it had been interviewing witnesses, obtained millions of documents and had even deposed Mr. Rajaratnam himself while trying to build its case.

The omission, Ms. Millett told Judges Dennis Jacobs (See Profile), Robert Katzmann (See Profile) and Peter Hall (See Profile), violated both the Fourth Amendment and the need to show the necessity of employing wiretaps. She said the government failed to give the judge who signed off on the warrant in 2008, then-Southern District Judge Gerard Lynch (See Profile), a full picture of the investigation and failed to make the required showing that conventional investigatory techniques would be futile.

The government’s “reckless disregard for the truth,” Ms. Millett said, constituted a “wholesale abdication of its duty to prove the necessity of a wiretap.”

But Southern District Assistant U.S. Attorney Jonathan Streeter told the panel the government expects to prevail easily on Mr. Rajaratnam’s appeal and the Sri Lankan native has every incentive to flee the United States if given the opportunity.

Read Mr. Rajaratnam’s motion and the government’s reply.

Mr. Streeter urged the panel to uphold the finding of Southern District Judge Richard Holwell (See Profile), who considered in 2010 whether Judge Lynch might have still authorized the wiretaps that helped convict Mr. Rajaratnam had he a more complete picture of the government’s investigation to date. Judge Lynch, he found, would have approved the wiretap.

Judge Holwell refused to suppress some 18,000 wiretapped conversations gathered over 19 months by the government in building its case against Mr. Rajaratnam (NYLJ Nov. 26, 2010).

The judge did so despite criticizing the government for “disturbing” misstatements and omissions that made it impossible for Judge Lynch to “determine whether a wiretap was necessary to this investigation” when he issued the warrant in 2008.

Nonetheless, Judge Holwell allowed the government to submit the missing evidence before issuing his opinion and order denying the Rajaratnam motion to suppress in November 2010.

This, Ms. Millett insisted yesterday, raises a “substantial legal question” that holds promise for her client’s appeal and justifies his release on bail pending oral argument and decision some time next year.

The unprecedented use of wiretaps in an insider trading case, 45 recordings in all, were a critical part of the evidence against Mr. Rajaratnam at his trial that ended in May with the jury voting to convict on all charges—five conspiracies and nine substantive counts of securities fraud (NYLJ, May 10).

On Oct. 13, Judge Holwell ordered Mr. Rajaratnam to prison while his appeal is pending, expressing his opinion that the appeal would most likely not result in a new trial (NYLJ, Oct. 14).

Risk of Flight Debated

Yesterday, the Second Circuit questioned the lawyers on the standard of review to apply to Judge Holwell’s bail decision. They also asked how they should evaluate the risk that Mr. Rajaratnam might flee as the prison gates draw near.

Judge Jacobs asked Ms. Millett, of Akin, Gump, Strauss, Hauer & Feld, whether the defendant, who suffers from advanced diabetes that is leading to imminent kidney failure, “might choose to live in Sri Lanka” instead of surrender to authorities in the United States.

Ms. Millett answered that Mr. Rajaratnam “can’t even get there” because he surrendered his passport and, given his poor health, “the flight itself would be very dangerous.”

Mr. Streeter told the court that the fact that Mr. Rajaratnam is currently wearing an electronic monitoring bracelet is little consolation because there are “hundreds of examples of people fleeing” while on the bracelet.

“How does that happen?” Judge Jacobs asked. “What? Do they use soap to get it off?”

Judge Hall, a former prosecutor, said the bracelet does not function as a GPS and Mr. Streeter returned to his argument that, once Mr. Rajaratnam left the country, it would be hard to get him back.

While Sri Lanka has an extradition treaty with the United States, he said, the United States has never successfully won the extradition of a defendant from that country. He also told the court that it was the defendant’s burden to prove “by clear and convincing evidence that he is not a flight risk.”

But when Judge Katzmann asked how often the United States had tried to extradite someone from Sri Lanka, the prosecutor could not cite a specific number.

Judge Jacobs pressed Mr. Streeter on just how critical were the omissions in the application to Judge Lynch, including the failure to tell the judge about a pending investigation by the Securities and Exchange Commission that had yet to bear fruit.

“Isn’t that something that a judge should know?” he asked.

Mr. Streeter answered that a “mistake was made” in not fully describing the SEC’s investigation, but Judge Holwell made the right move in complementing the record and ruling the government had shown enough to obtain the warrant without violating the Constitution or the strictures of Title III, the electronic surveillance statute, 18 U.S.C. §§2510-2522.

In her brief, Ms. Millett said, “The government had no business telling a judge under oath that its conventional techniques weren’t working when it had not even bothered to review the vast majority of the information sitting in its hands.”

She also pressed the argument that Title III does not include the offenses of insider trading or securities fraud on the list of crimes for which wiretaps are authorized.

Yesterday, in rebuttal, Ms. Millett insisted that the government had to be held to the standards of Title III, where she said “suppression is broader,” not narrower, than the requirements of the Fourth Amendment.

The court reserved its decision.

Related Case

Meanwhile, in a related case, Southern District Judge Jed Rakoff signed an order Tuesday that requires Goldman Sachs chairman Lloyd Blankfein and six others to answer questions related to the civil case brought against former Goldman Sachs board member Rajat Gupta.

Mr. Gupta faces an April criminal trial on charges that he conspired with Mr. Rajaratnam to break securities fraud laws through insider trading. If convicted, he faces up to 105 years in prison. He has pleaded not guilty.

Judge Rakoff said in his written order that he saw no reason to delay the depositions of Mr. Blankfein and others because the Southern District U.S. Attorney’s office has indicated it is unlikely to call them as witnesses at the criminal trial.

Mr. Blankfein was called to testify during the trial of Mr. Rajaratnam that a phone call Mr. Gupta made to Mr. Rajaratnam after a board meeting violated the investment bank’s confidentiality policies.

Jurors heard testimony that at an Oct. 23, 2008, Goldman board meeting, members were told that the investment bank was facing a quarterly loss for the first time since it had gone public in 1999.

Prosecutors produced phone records showing Mr. Gupta called Mr. Rajaratnam 23 seconds after the meeting ended, causing Mr. Rajaratnam to sell his entire position in Goldman the next morning and save millions of dollars.

Mr. Rajaratnam also earned close to $1 million when Mr. Gupta told him that Goldman had received an offer from Warren Buffett’s Berkshire Hathaway to invest $5 billion in the banking giant, prosecutors said.