By Grant McCool
NEW YORK (Reuters) - The biggest Wall Street insider trading criminal case in a generation goes to trial on Wednesday, when prosecutors open their case against Galleon Group founder Raj Rajaratnam whose arrest 16 months ago shook the hedge fund world.
A jury of New Yorkers will hear prosecutors outlining how they believe Sri Lankan-born Rajaratnam broke the law by designing a complex web of stock tippers who helped him reap $45 million in illicit profit between 2003 and March 2009.
For the first time, the jury and observers of the high-profile case will be given an insight into the defense trial strategy, which faces seemingly overwhelming evidence of leaked corporate secrets, tapped telephones and friends-turned-government witnesses.
"The defense doesn't really get to show the whole picture until the trial and then it really can be quite different and end up with surprising results," said Stuart Gasner, securities fraud defense lawyer at Keker & Van Nest law firm in San Francisco and a former prosecutor.
The selection of a jury of 12 and six alternates began on Tuesday and is expected to be completed on Wednesday.
Presiding U.S. District Judge Richard Holwell sent prospective jurors home with a warning not to read anything about the highly-publicized case. He then told prosecutors and Rajaratnam's multimillion dollar defense team that opening statements would go ahead "for sure" on Wednesday.
Since arresting 53-year-old U.S. citizen Rajaratnam in October 2009 and announcing criminal charges against 26 former traders, executives and lawyers, the U.S. government has pressed ahead with what it calls the biggest probe of insider trading in the $1.9 trillion hedge fund industry.
Nineteen people have pleaded guilty in the Galleon case. It stands apart from past insider trading investigations because of the government's wide-scale use of phone taps. As many as 173 audio recordings will be played to the jury during the two-month long trial.
Rajaratnam was mobbed by photographers and TV crews when he walked into the courthouse on Tuesday morning and as he left at the end of the day. Dressed in a brown coat and a suit, he said nothing on both occasions.
Chief defense lawyer John Dowd has argued in court papers that prosecutors have broadened the definition of insider trading. He said a money manager's liberty should not be at risk because he trades on a stock while knowing something about the company.
The burden of proof is on prosecutors to convince the jury that their evidence shows Rajaratnam knew he was trading on confidential information provided by someone who had a fiduciary duty not to disclose it.
In the week before the trial, U.S. market regulators and prosecutors uncorked allegations against Rajaratnam's friend and former Goldman Sachs Group Inc director Rajat Gupta. They described phone calls in which he tipped Rajaratnam about confidential Goldman information before it became public.
Gupta faces a civil proceeding brought by the U.S. Securities and Exchange Commission but he has not been criminally charged. Lloyd Blankfein and David Viniar -- the Goldman Sachs chief executive and chief financial officer -- were on a list of people who might testify or be mentioned during the trial.
The case is USA v Raj Rajaratnam, U.S. District Court for the Southern District of New York, No. 09-01184.
(Reporting by Grant McCool, editing by Andrew Marshall)