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Last count survives in Rajaratnam brother's insider trading trial

NEW YORK, July 2 (Reuters) - Prosecutors avoided the dismissal of the last remaining count against Rengan Rajaratnam on Wednesday, a day after a federal judge tossed the primary fraud charges against Galleon Group founder Raj Rajaratnam's younger brother.

Following arguments at a hearing in New York, U.S. District Judge Naomi Reice Buchwald declined to dismiss a count of conspiracy against Rengan Rajaratnam, allowing the case to proceed to the jury.

"I very much enjoyed hearing a preview of your summations, but I think I am going to have to hear them again," Buchwald said.

The ruling came after she dismissed two securities fraud counts against Rajaratnam, 43, related to the government's claims he engaged in insider trading in technology company Clearwire Corp in 2008.

The non-appealable decision meant Rajaratnam, a former Galleon portfolio manager, would avoid the most serious charges he faced, each of which carried a maximum term of 20 years in prison. The remaining conspiracy count carries up to five years in prison.

The ruling was a serious blow to prosecutors under Manhattan U.S. Attorney Preet Bharara, whose office has won 81 insider trading convictions of individuals through pleas or jury verdicts since October 2009, never losing at trial.

The ruling's impact could be seen throughout Wednesday's arguments, which drew the attendance of Bharara's top deputy, Richard Zabel.

A comment by assistant U.S. attorney Randall Jackson that the prosecution might still focus on how a tip about Clearwire to Raj Rajaratnam went to Rengan drew criticism from Buchwald.

"I made a ruling on that yesterday," she said. "What you're saying is inconsistent with that."

Rajaratnam's lawyer, Daniel Gitner, had sought to bar the government from arguing anything about Clearwire going forward.

Buchwald declined his request, saying it was not in his interest, given how she found no jury could reasonably find Rajaratnam engaged in insider trading in Clearwire.

Many of the arguments over the remaining count turned on whether prosecutors could establish Rajaratnam engaged in a conspiracy regarding the stock of another company, Advanced Micro Devices Inc.

Prosecutors contend that in August 2008, Raj Rajaratnam told his brother of a "handshake" deal between AMD and an Abu Dhabi state-owned company he learned about from Anil Kumar, a McKinsey & Company partner.

In a wiretapped recording of a call that same day, Rengan Rajaratnam told his brother he had talked with another McKinsey partner, David Palecek, who "spilled his beans," encouraged him to buy AMD and was "a little dirty."

Gitner said his client was simply seeking investment advice from Palecek and discussed other stocks despite prohibitions imposed on McKinsey partners.

But Christopher Frey, another prosecutor, said Rajaratnam's "own words belie the notion" that he was not seeking inside information, pointing to part of the call when Rajaratnam said Palecek "kind of volunteered the information on the investments."

Raj Rajaratnam is serving an 11-year prison term following his 2011 conviction. Kumar pleaded guilty and was sentenced to two years probation in 2012. Palecek died in 2010.

The case is U.S. v. Rajaratnam, U.S. District Court, Southern District of New York, No. 13-00211.

(Reporting by Nate Raymond in New York; Editing by Ted Botha and Leslie Adler)