14 more charged with insider trading

After weeks of speculation on Wall Street, prosecutors brought a fresh round of insider trading charges on Thursday that left no doubt they were aiming at hedge funds and the networks of market gossip that are endemic on trading floors.

The charges, against 14 money managers, lawyers and other investors, followed the arrest last month of a hedge fund billionaire, Raj Rajaratnam, on charges that he had profited from inside information.
In the latest criminal complaints, prosecutors described a network that used prepaid cell phones to avoid detection, and that was pierced in part through surveillance and wiretaps.

One law enforcement official, speaking on condition of anonymity because the investigation is continuing, said the authorities expected to make more arrests in the coming weeks. The investigation is part of a broad Federal Bureau of Investigation push into crimes related to hedge funds, including the addition of a third securities fraud unit in New York, the official said.

And for the first time, the authorities hinted that they might be brushing against the pinnacle of the hedge fund world, SAC Capital Management, a $12 billion Connecticut fund company. Neither SAC nor any current employee has been charged with wrongdoing.

The broadest of Thursday’s complaints names seven defendants, including Arthur J. Cutillo, a lawyer at the prestigious firm of Ropes & Gray, who is accused of offering tips on impending takeovers that the firm worked on. The tips were then passed among a group of lawyers and traders.
Plea agreement
As part of a plea agreement made public on Thursday, prosecutors agreed not to charge Richard Choo-Beng Lee, a California fund manager who worked at SAC from 1999 through January 2004, on any insider trading he committed at SAC as long as he had disclosed the insider trading to them. Lee pleaded guilty in October to insider trading while running his own hedge fund last year. ers and traders.
Defense lawyers who were not involved in the case said the government’s tactics, which included phone taps and wiring cooperating witnesses, were more typically used in organized crime than in securities fraud cases.

Galleon at center
Still, the investigation has not publicly ensnared any of the biggest hedge funds. And the total profits that the schemes are said to have produced are relatively modest, about $60 million so far.

Rajaratnam is not named in any of the complaints or pleas announced on Thursday. But Galleon, his company, appears to be at the center of the investigation. The two men identified as leaders of the ring, Zvi Goffer and Craig Drimal, are former employees of Galleon.

Goffer worked at Galleon from January to August 2008, while Drimal had an office at Galleon, according to the complaint. A person knowledgeable about Galleon said that Goffer had been laid off last year as part of a broader staff reduction, while Drimal was once an employee
Thursday’s complaint does not claim that the men used insider information on Galleon’s behalf. Instead, it claims that they traded for their own accounts, making millions of dollars buying stocks in companies that were about to be taken over. Drimal made the largest profits, earning $8 million, according to the complaint.

The defendants were concerned about the possibility of wiretaps and informants and frequently talked about ways to avoid being caught, according to the complaint. It said that in February 2008, Goffer warned Jason C. Goldfarb, another defendant, against making trades that were too obvious.
The complaints represent a significant expansion of a case that has gripped the hedge fund community.

Researching a company’s prospects is a crucial part of investing, and hedge fund managers, stock analysts and other investors regularly swap information about the companies they own. But they are not allowed to buy and sell stocks based on important information that has not been disclosed to the public, such as the news that a company is about to be taken over, or word from a corporate executive that a company’s earnings will fall short.
In contrast, much of the complaint against Rajaratnam focuses on his habit of swapping tips and rumors in advance of quarterly earnings reports and other corporate announcements, a practice on Wall Street that has been routine–at least until now.