By Grant McCool

NEW YORK (Reuters) - A U.S. appeals court onWednesday barred securities regulators from gaining access tothousands of secretly recorded conversations in the Galleonhedge fund insider trading case, a victory for fund founder RajRajaratnam.

The 2nd U.S. Circuit Court of Appeals in New York ruled infavor of Rajaratnam and principal co-defendant Danielle Chiesi,a former trader at New Castle Funds, who argued that wiretapsof private conversations would needlessly be disclosed to theU.S. Securities and Exchange Commission.

The appeals court dismissed an order by U.S. District JudgeJed Rakoff granting access to the recorded conversations. Itsaid Rakoff should have waited for a ruling on the legality ofthe wiretaps, and should have limited disclosure to relevantconversations.

The appeals court opinion was published five days beforeanother judge presides over a relatively uncommon evidentiaryhearing on the defendants' challenges as to how thecourt-ordered wiretaps were obtained.

"While the district court was correct that the SEC had alegitimate right of access to the wiretap materials, it couldnot properly balance that interest against the privacyinterests at stake while the legality of the wiretaps was stillunresolved," said the written opinion by the three-judgepanel.

The court said Rakoff, who oversees the SEC's civil caseagainst Rajaratnam and Chiesi, erred in ordering the disclosureof conversations involving hundreds of parties.

A spokesman for the SEC declined immediate comment.

U.S. prosecutors describe the parallel criminal and civilprobes as the biggest involving allegations of insider tradingat hedge funds in the United States. Rajaratnam and Chiesi werearrested on Oct. 16 last year on charges of conspiracy andsecurities fraud. Both have denied any wrongdoing.

In all, 21 people were charged. Twelve have pleaded guilty,eight not guilty and one is at large.

Rakoff granted the SEC access to the wiretaps as part ofdiscovery in the civil case. Rajaratnam and Chiesi argued thatdisclosure was prohibited by a statute known as Title III ofthe Omnibus Crime Control and Safe Streets Act of 1968.

Prosecutors say the case marks the first wiretaps used in awidespread probe of insider trading on Wall Street. SriLankan-born Rajaratnam is accused of making about $45 millionand Chiesi $4 million from trading on inside information.

Wiretaps historically have been used in investigations oforganized crime groups and drug trafficking.

Their use in the Galleon probe ensnared corporateexecutives, traders and lawyers accused of swapping insideinformation about several stocks, mostly technology companies.

The cases are USA v Raj Rajaratnam et al, U.S. DistrictCourt for the Southern District of New York, No. 09-01184 andSEC v Galleon Management LP et al No. 09-08811. (Reporting by Grant McCool; editing by John Wallace)