Federal investigators suspected a decade ago that Galleon Group hedge fund founder Raj Rajaratnam was trading on inside information but were unable to prove he was breaking the law.

The news surfaced in documents unsealed this week in a San Jose, California, federal court concerning a 2001 guilty plea to wire fraud by Roomy Khan, a former employee at Intel Corp and later at Galleon.

Khan is now cooperating with the government in a wide-ranging insider-trading probe. Rajaratnam is the most prominent defendant facing criminal charges so far.

Rajaratnam, 52, has denied the new charges. He had sought to have Khan's earlier case unsealed. Khan is now 51.

Dan Gagnier, an outside spokesman for Rajaratnam's lawyer, John Dowd, declined to comment. Intel spokesman Chuck Mulloy declined to comment. A lawyer for Khan did not immediately return a call seeking comment.

According to a June 2002 sentencing memorandum for Khan, the earlier case arose after Intel suspected Rajaratnam was getting tips from an Intel insider because he was predicting Intel's revenue with extreme accuracy.

Intel set up a hidden video camera that on March 6, 1998, recorded Khan, employed as a product marketing engineer at the company, faxing an important report concerning Intel's three main Pentium processors to Rajaratnam.

The memo said Khan on March 24 then faxed handwritten pages that contained pricing information and sales data for Intel chips. By multiplying those numbers, one can determine Intel's total revenue for the quarter, it said.

As of 2002, investigators including the U.S. Securities and Exchange Commission and the Federal Bureau of Investigation were continuing a probe into Rajaratnam's activities.

After an exhaustive analysis of the labyrinth of accounts associated with Galleon, however, the SEC/FBI has not been able to show that any Galleon trade resulted from Rajaratnam's possession of the information stolen for him by Kahn (sic) from Intel, the memorandum shows.

Government investigators have pushed hard in recent months to uncover white-collar crime and to publicize their efforts, after missing Bernard Madoff's Ponzi scheme for decades.

Khan could have faced prison time for wire fraud. The government, however, recommended probation after she began to cooperate in a probe into Rajaratnam's practices, the memorandum shows. Khan later served home confinement.

Rajaratnam is free on $100 million bond.

The earlier case, which misspells Khan's name, is U.S. v. Kahn, U.S. District Court, Northern District of California, No. 01-cr-20029. Current proceedings include U.S. v. Rajaratnam, U.S. District Court, Southern District of New York, No. 09-mj-02306, and SEC v. Galleon Management LP et al in the same court, No. 09-08811.

(Reporting by Alexandria Sage in San Jose, California; Additional reporting by Grant McCool and Jonathan Stempel in New York and Ian Sherr in San Francisco; Writing by Jonathan Stempel; editing by John Wallace)

MEET IBT NEWS FROM BELOW CHANNELS