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CNBC ON DIGG

Fourteen More Are Charged In Growing Insider-Trading Case

Published: Thursday, 5 Nov 2009 | 3:29 PM ET

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By: Scott Cohn
Senior Correspondent, CNBC

Fourteen more people have been charged in a widening federal investigation of insider trading that started in the hedge fund industry but now includes a broad array of Wall Street firms.

The new defendants include not only hedge fund traders but money managers, a mergers and acquisitions attorney, a corporate executive, and an associate analyst for the Moody's credit rating agency.

The latest arrests Thursday morning, first reported by CNBC, stem from the same probe that led to the arrest last month of Raj Rajaratnam, founder of the Galleon Group hedge fund. As in the Rajaratnam case, authorities uncovered the alleged insider trading with wiretaps and confidential informants.

But the new charges appear to go far beyond the Galleon case.

The new case alleges that money manager Zvi Goffer led an insider trading ring, first based at the Schottenfeld Group, where he worked in 2007. Goffer then moved on to Galleon, then started his own firm, Incremental Capital.

Schottenfeld group declined to comment, as did Incremental Capital.

Much of the alleged insider trading involved the private equity boom in 2007, according to the complaints.

Goffer allegedly supplied his tipsters with pre-paid cellular phones in order to conceal their activity, and paid them in cash.

The alleged tipsters include two attorneys, Arthur Cutillo of Ropes & Gray in New York, and Jason Goldfarb, whose firm was not identified. The two allegedly tipped Goffer and his associates about upcoming private equity takeovers of firms including 3Com [COMS Loading... () ], Avaya , Axcan Pharmaceuticals and Hilton Hotels [HLNQ Loading... () ].

In a statement, Ropes & Gray said it was "deeply disappointed" in the charges and is cooperating with authorities.

"We allege some of the defendants (were) taking a page from the drug dealers' playbook (and) deliberately used anonymous, hard-to-trace, pre-paid cellphones in order to avoid law enforcement detection," federal prosecutor Preet Bharara told a news conference.

"When sophisticated business people begin to adopt the methods of common criminals, we have no choice but to treat them as such," he said.

In a separate complaint, prosecutors charged Moody's Associate Analyst Deep Shah with providing inside information about the 2007 takeover of Hilton to a confidential informant. Moody's was not immediately available for comment.

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And in a third complaint, authorities charged Ali Hariri, a vice president at telecom firm Atheros, with providing inside information to a confidential informant about a 2008 profit warning at the firm.

In addition to those charged Thursday, authorities announced that five people have pleaded guilty in the case.

They are: Steven Fortuna, a managing director at hedge fund S2 Capital; Ali Far, founder of hedge fund Sperix, Sperix's president, Richard Choo-Beng Lee; trader and hedge fund consultant Roomy Khan; and Gautham Shankar, a proprietary trader for Schottenfeld.

The latest charges come after Raj Rajaratnam, the billionaire founder of the Galleon, was charged along with five others in an insider trading scandal.

Galleon, a prominent New York-based firm that once managed $7 billion and specialized in technology and healthcare companies, has since shut down.

According to an SEC complaint, the Galleon case involved stocks of 10 different companies, including Google, [GOOG Loading... () ] Hilton Hotels and Intel [INTC Loading... () ]

The scandal sent shockwaves through the financial world and unnerved the $1.4 trillion hedge fund industry at a time when performance was improving and investors were committing new money.

Bail Reduction Denied

A federal judge refused on Thursday to lower the $100 million bail for Raj Rajaratnam.

U.S. Magistrate Judge Theodore Katz did agreed to defense lawyers' request to ease travel restrictions for the Sri Lanka native, letting him travel within the United States provided government officials know in advance where he is going.

—Reuters contributed to this report.