By Grant McCool
NEW YORK (Reuters) - Convicted hedge fund founder Raj Rajaratnam is in prison, but the jurors of a separate insider trading trial of former Goldman Sachs Group Inc
A federal judge in New York made a preliminary ruling on Wednesday to allow prosecutors to play a recorded telephone conversation from July 29, 2008, between Rajaratnam and Gupta, whose trial starts next Monday.
Over defense objections, U.S. District Judge Jed Rakoff said the 24 minute-long call was relevant as the "one and only direct evidence of the telephone relationship between Mr. Rajaratnam and Mr. Gupta.
"It shows the nature of the relationship even if there is nothing improper on the call," Rakoff said at the final pre-trial hearing.
Gupta, the most prominent corporate figure indicted in a U.S. government crackdown on insider trading at hedge funds in recent years, is heard telling Rajaratnam that the Goldman board discussed the firm's possible interest in acquiring a commercial bank or insurance giant American International Group Inc
The information is not included in the charges against Gupta. His main lawyer, Gary Naftalis, argued that Gupta was "basically confirming a rumor" and Goldman customers, including hedge funds, already knew about it from the firm's executives.
Galleon Group hedge fund founder Rajaratnam, 53, was convicted a year ago on evidence largely based on court-approved wiretaps of his phones. He is appealing the use of wiretaps as he serves an 11-year prison term, the longest handed down for insider trading in the United States.
Gupta, 63, was charged last October with five counts of securities fraud and one count of conspiracy, allegations he denies. His trial is expected to last three weeks. If convicted, he could face up to 25 years in prison.
The first witness to be called on Monday or Tuesday will be former Galleon secretary Karyn Eisenberg, U.S. prosecutor Reed Brodsky said in court on Wednesday.
Prosecutors accuse the former corporate board member - he also led the McKinsey & Co consultancy for nine years - of giving Rajaratnam information from Goldman and Procter & Gamble Co board meetings in 2007 and 2008. In addition to sitting on the Goldman board, Gupta also was a director at P&G.
Gupta contends he lost money investing with Rajaratnam and that as many as four other Goldman personnel could have tipped off Galleon with the company's confidential information.
RAJARATNAM CALLS WITH TRADERS
At Wednesday's hearing, the judge also gave tentative approval to prosecutors to present three telephone call recordings between Rajaratnam and two Galleon traders in September and October 2008.
Rakoff said the ruling was not final. He said the three calls "are admissible subject to connection in furtherance of the alleged conspiracy between Mr. Gupta and Mr. Rajaratnam."
The judge said the government runs the risk that, if the connection is not made, there is potential for a mistrial. During the trial, Gupta's lawyers have the right to ask the judge to exclude government evidence.
Two of the three phone calls the government wants admitted at trial were between Rajaratnam and his principal trader, Ian Horowitz on September 23, 2008. The other was with portfolio manager David Lau on October 23. There are no recordings of phone conversations between Gupta and Rajaratnam on those dates.
Gupta's lawyers argue that the evidence against him is circumstantial. Defense lawyer Naftalis argued that toll records show brief phone connections between Gupta and Rajaratnam.
"There may not even have been a conversation," Naftalis said in court on Wednesday. "We are dealing with speculation upon speculation here."
Prosecutors say Gupta gave Rajaratnam advance knowledge of a $5 billion investment in Goldman by Warren Buffett's Berkshire Hathaway Inc
The case is USA v. Gupta, U.S. District Court for the Southern District of New York, No. 11-907.
(Editing by Andre Grenon)