Another 14 Charged in Insider Trading Investigation

(Adds details from allegations, press conference, no comment from lawyers for some defendants.)

NEW YORK -(Dow Jones)- Prosecutors in New York charged 14 additional people with crimes Thursday, including lawyers, a former Moody's Investors Service analyst and the founder of trading firm Incremental Capital, in an expanding insider-trading probe that had identified some $40 million in improper profits.

The latest charges further paint a picture of unscrupulous executives and deal lawyers who advised companies on potential acquisitions passing along tips to hedge-fund managers and Wall Street traders about pending deals.

The case follows up on criminal charges brought last month against Raj Rajaratnam, founder of hedge-fund firm Galleon Group, and five others in an alleged insider-trading scheme that netted $20 million in improper profits.

"This investigation goes to the heart of fair play in the business world," said Preet Bharara, the U.S. Attorney in Manhattan, at a press conference Thursday. "If you cheat, there are consequences."

Eight people were taken into custody Thursday by the Federal Bureau of Investigation, including one in California. They are expected to appear in federal court later Thursday.

They are: Zvi Goffer, founder of Incremental Capital and a former Galleon employee; Arthur Cutillo, an intellectual-property lawyer at Ropes & Gray LLP; Jason Goldfarb, an associated at another New York law firm; Craig Drimal, who worked in Galleon's office space, but wasn't employed by the firm; Atheros Communications Inc. (ATHR) executive Ali Hariri; and several individuals associated with Incremental Capital: Emanuel Goffer, Michael Kimelman, David Plate.

Lawyers for Drimal and Kimelman declined comment Thursday. Lawyers for Goldfarb and Zvi Goffer didn't immediately return phone calls seeking comment. Lawyers for the other defendants couldn't immediately be located for comment.

Five others have pleaded guilty and are cooperating with prosecutors in the probe.

They include Roomy Khan, who has been identified by people familiar with the investigation as the tipster at the center of the Galleon probe.

Khan's lawyer didn't return calls for comment.

Deep Shah, a former Moody's analyst who allegedly passed information to her, was among the nine charged Thursday. Shah, who is in India, has previously denied wrongdoing.

The charges outlined Thursday in eight criminal complaints include insider trading and conspiracy and revolve around tips about pending mergers and acquisitions.

The SEC brought a separate civil insider-trading complaint against Zvi Goffer, Emanuel Goffer, Cutillo, Goldfarb, Drimal, Kimelman, Plate and Gautham Shankar, a proprietary trader at Schottenfeld Group LLC who has pleaded guilty in the criminal case and is cooperating in the matter.

Shankar's lawyer didn't return calls for comment.

The regulator also amended its prior civil complaint against Rajaratnam, adding 13 individuals and entities, including several of the persons charged criminally on Thursday.

The SEC has alleged the two cases encompass about $53 million in illicit trades.

In court documents, prosecutors alleged Zvi Goffer operated an "insider trading network" through which he received material, nonpublic information regarding mergers and acquisitions and then traded on it, and passed it on to his co-conspirators.

"There is probable cause to believe that Zvi Goffer and his co-conspirators obtained and used for securities transactions inside information concerning mergers and acquisitions in which Ropes & Gray played a role," the complaint said.

Some of the alleged trades were made on information similar to that obtained and traded on by Rajaratnam, including the announcement of an acquisition of Hilton Hotels Corp. by Blackstone Group LP (BX) in July 2007.

Cutillo allegedly gave the inside information to another lawyer, Goldfarb, who then passed it onto Zvi Goffer.

Zvi Goffer would use the information to execute profitable securities transactions and provide inside information to other conspirators to earn similar profits. It is also believed Zvi Goffer provided the co-conspirators with prepaid cellphones so they could reduce the chances of law-enforcement detection.

The acquisitions include the 2007 deal with Avaya Inc. Avaya agreed to a merger with Silver Lake and TPG Capital, which were legally advised by Ropes & Gray. The firm also legally advised Bain Capital Partners LLC in its failed bid to acquire 3Com Corp. (COMS).

Like the Galleon case, investigators have intercepted telephone conversations with Zvi Goffer and recorded conversations with a cooperating witness in which Zvi Goffer or Drimal allegedly discussed how they received inside information on pending deals or discussed profits from the deals, according to the complaint.

Prosecutors have pointed to the use of wiretaps in the Galleon case as an important step forward in pursuing insider-trading crimes.

In December 2007, Zvi Goffer allegedly met with the cooperating witness in attempt to recruit that person to join Incremental Capital, according to court papers. During the conversation, Zvi Goffer allegedly told the cooperating witness that his source--a childhood friend--gave him details about four deals, including 3Com, according to the complaint.

However, Zvi Goffer allegedly told Drimal in an intercepted telephone conversation from his cellphone that he was leading the cooperating witness "away from where Goffer really got the information," according to the complaint. The cooperating witness, who isn't identified, has agreed to plead guilty to criminal charges in hopes of receiving a lesser sentence.

In a February 2008 phone call, Zvi Goffer allegedly instructed Kimelman to print out and collect analyst research reports and other publicly available data in order to disguise their transactions in case they were scrutinized by regulators.

Zvi Goffer worked at Schottenfeld from about January 2007 to December of that year. He then worked at Galleon until August 2008 and started an operating trading firm called Incremental Capital around that same time.

Besides Khan and Shankar, the five who pleaded guilty were Steven Fortuna, former managing director of S2 Capital LLC, a Boston hedge fund; Ali Far, founder of California hedge fund Spherix Capital LLC; and former Spherix President Richard Choo-Beng Lee.

Lee's lawyer, Jeffrey L. Bornstein, said his client "intends to fully cooperate" with the U.S. Attorney's office. A lawyer for Far declined to comment. Fortuna's lawyer, Richard J. Schaeffer said, "Mr. Fortuna has accepted responsibility for his conduct and has pled guilty."

A Galleon spokesman didn't immediately comment. A person answering the phone at Incremental Capital said the firm had "no comment at this time."

A spokesman for Ropes & Gray said the firm was "deeply disappointed to learn about this situation, which suggests an extreme breach of this person's duty of trust to our clients and to the firm. We cannot comment in detail on an ongoing investigation but we are moving quickly to protect our clients and are cooperating fully with authorities."

3Com President and Chief Operating Officer Ron Sege said the company hasn't worked with Ropes & Gray since he joined the company a little more than a year ago, and declined to comment. The law firm was an adviser in Bain Capital Partners' attempt to acquire 3Com early last year, which ultimately fell apart due to U.S. government scrutiny.

Rick Schottenfeld, founder of Schottenfeld Group, said in a statement, "We are deeply troubled and shocked by the criminal allegations made today against former employees of our firm. These individuals have not been affiliated with the firm for nearly two years. None of the principals nor any present employees of the firm have been named in connection with this criminal investigation. We plan to cooperate fully and completely with the authorities in their investigations of this matter."

In a separate complaint, prosecutors alleged that Shah, the former Moody's analyst, provided insider information to Khan. She is a hedge-fund manager who briefly worked for Galleon in the late 1990s.

Prosecutors also alleged that Hariri, who was vice president of Atheros' broadband carrier networking business, provided inside tips to a cooperating witness about the company's plans to revise its earnings guidance downward in December 2008.

The cooperating witness isn't named, but is described as a California hedge fund manager.

Wiretaps of the cooperating witness's phone were part of the Hariri case.

-By Chad Bray, Dow Jones Newswires; 212-227-2017; chad.bray@dowjones.com

(John Kell, David Benoit, Joseph Checkler, Roger Cheng, Chris Herring and Joe Bel Bruno contributed to this article.)

(END) Dow Jones Newswires

11-05-09 1555ET