Hedge Fund Managers, Traders Charged in Galleon Probe

Hedge Fund Managers, Traders Charged in Galleon Probe

Nov. 5 (Bloomberg) -- U.S. prosecutors charged 14 people, including hedge fund managers, lawyers and an ex-Galleon Group employee, for using the methods of “drug dealers” and “common criminals” to profit on insider data from deals involving firms such as 3Com Corp. and Alliance Data Systems Corp.

The charges, brought as part of the government’s insider trading probe of Galleon founder Raj Rajaratnam, bring the illicit profits alleged in the case to as much as $53 million. Five of those charged today pleaded guilty and are cooperating in the investigation, prosecutors said.

At the center of a new insider trading ring are Zvi Goffer, 32, a former Galleon employee who sought tips, and Arthur Cutillo, 33, an attorney at Ropes & Gray LLP and the ring’s key source of information, federal officials said. Goffer, founder of Incremental Capital LLC, paid tipsters including Cutillo for information on mergers and acquisitions, giving them pre-paid mobile phones so they could avoid surveillance, the U.S. said.

The defendants behaved like “common criminals” who took a “page from drug-dealer handbooks,” Manhattan U.S. Attorney Preet Bharara said today at a press conference. The probe is focused on hedge funds and their sources of information, he said, adding that more arrests may be coming.

“If you’re a wealthy trader, you aren’t special,” Bharara warned. “Knock on our door before we come knocking on yours.”

Last Month’s Charges

Today’s arrests add to last month’s charges against Rajaratnam and five others for what the government said was the largest hedge fund insider-trading ring ever prosecuted. The U.S. says Rajaratnam received tips from a network of high- ranking executives including co-defendants Rajiv Goel, who worked at Intel Capital, and Anil Kumar, who worked as a director at McKinsey & Co. All have denied any wrongdoing.

Also arrested today were Craig Drimal, 53, who worked at Galleon’s offices, Brooklyn, New York-based attorney Jason Goldfarb, 31, Zvi Goffer’s brother Emanuel Goffer, 31, David Plate, 34, and Michael Kimelman, 38. Charges against the 14 defendants include conspiracy and fraud.

Goldfarb, of New York City, is a friend of Cutillo, a resident of Ridgewood, New Jersey, according to the SEC complaint. The lawyer was used as the middleman to get deal information to Zvi Goffer, also a New York City resident, the U.S. said.

Roomy Khan

Prosecutors disclosed today that Roomy Khan, a former Intel Corp. employee, pleaded guilty last month. She is a key government witness in the Rajaratnam case, according to a person familiar with the matter. Khan, who had previously been convicted of funneling information to Galleon, earned $1.6 million from insider trades in the latest scheme, according to the U.S.

Khan’s lawyer, Stanislao German, didn’t immediately return a call seeking comment.

Also pleading guilty were Steven Fortuna, a managing director at hedge fund S2 Capital in Boston; Gautham Shankar, 35, of New Canaan, Connecticut, a former trader at Schottenfeld Group LLC, where Zvi Goffer once worked; and Richard Choo-Beng Lee, a portfolio manager at an unidentified hedge fund.

Lee and Ali Far, who has also pleaded guilty, later formed their own hedge fund, Spherix Capital, prosecutors said.

All four men are cooperating, U.S. Attorney Bharara said.

Zvi Goffer’s attorney Cynthia Monaco, Kimelman’s attorney Michael Sommer, Drimal’s attorney JaneAnne Murray and Goldfarb’s attorney Harvey Greenberg didn’t immediately return messages seeking comment on the charges. Far’s lawyer Steven Kobre, Lee’s lawyer Jeffrey Bornstein and Shankar’s lawyer Frederick Sosinsky also didn’t immediately return phone messages.

“Fortuna has pled guilty and accepts responsibility for his conduct,” his lawyer, Richard Schaeffer, said in a telephone interview.

Goffer Brothers

The Goffer brothers both worked at Echotrade LLC, a registered broker-dealer, according to the government. Kimelman, 38, of Larchmont, New York, was a trader at Lighthouse Financial Group, a New York-based investment bank, as well as Incremental and Echotrade, according to court filings. Drimal, of Weston, Connecticut, was also a trader at Incremental and a representative of Echotrade, the U.S. said.

The U.S. Securities and Exchange Commission, which said profits in the overall Galleon investigation were as much as $53 million, filed additional civil complaints in the probe today. The regulator added as defendants Drimal, Cutillo, Goldfarb, Zvi and Emanuel Goffer, Kimelman, Plate and Shankar. Also sued was the Schottenfeld Group. The SEC said that the insider ring revealed today reaped as much as $20 million.

Schottenfeld Group said in a statement that it was “shocked by the criminal allegations” against some of its former employees and that it will cooperate with the government.

Center of Scheme

Cutillo, who has since left Ropes & Gray, was allegedly at the center of the scheme, the government said. He provided Goldfarb with inside information on at least four proposed corporate transactions in exchange for kickbacks, according to court papers.

Cutillo allegedly used disposable cell phones to pass along the tips to Goldfarb and Zvi Goffer, known within the ring as “the Octopussy,” a reference to the 1983 James Bond film starring Roger Moore. The nickname stemmed from a reputation for having multiple sources of inside information, the SEC said.

Goffer gave one of his tippees a disposable mobile phone prior to Bain Capital LLC’s proposed buyout of 3Com. The phone had two programmed numbers labeled “you” and “me,” the SEC said. After the acquisition was announced, Goffer destroyed the phone by removing the SIM card, biting it, and breaking the phone in half and telling his tippee to get rid of the other half of the phone, the SEC said.

‘Misguided Step’

“There should be a moment -- hopefully before you’re holding a bag of cash delivered to you by somebody code-named ‘the Octopussy’ -- that causes anyone in a position to tip or trade on inside information to think twice before taking such a misguided step,” said SEC Enforcement Director Robert Khuzami. “And if you find yourself chewing the memory card in your cell phone to destroy any record of your misconduct, something has gone terribly wrong with your character.”

Cutillo allegedly stole information from his Boston-based law firm and leaked it to Goldfarb, according to the FBI. Investigators said they also tapped Drimal’s mobile phone as part of their probe. Wiretaps provided much of the crucial information at the center of the Rajaratnam insider ring.

Dan Gagnier, a spokesman for Galleon, declined to comment.

Insider Crackdown

Rajaratnam, 52, a billionaire, and his codefendants were charged Oct. 16 as part of a crackdown on insider trading that authorities began two years ago using data-mining techniques and court-approved electronic surveillance. Investigators said Rajaratnam and the five accused accomplices charged at the time made illegal stock trades based on secret tips gathered over more than three years.

Federal law enforcement officials have struggled to build cases against large institutional investors such as hedge-fund managers, who often seek to deflect regulatory queries about suspiciously timed bets by arguing they’re statistical flukes amid millions of trades.

Rajaratnam, who is free on $100 million bail, told his employees Oct. 19 that he will fight the charges, according to two people familiar with his speech. He has said he is innocent.

A federal judge today refused to reduce Rajaratnam’s bail. U.S. Magistrate Judge Theodore Katz in Manhattan agreed to permit wider travel for the hedge fund founder, who until now had been restricted to traveling no farther than 110 miles from New York City.

Incremental Capital

Today’s charges also focus on Zvi Goffer’s trading firm, Incremental Capital. Other defendants arrested today who the government said were connected to the firm include Kimelman, Plate and Emmanuel Goffer, Zvi’s brother.

Authorities said in court papers that Zvi Goffer had said that his brother Emmanuel made $2 million on insider information related to Blackstone’s purchase of Hilton Hotels Corp. and the 3Com deal.

Kronos Inc.’s purchase by Hellman & Friedman Capital Partners VI LP was also targeted by insiders in the alleged scheme, according to prosecutors. Inside information used by the defendants also touched on TPG Capital’s acquisition of Axcan Pharma Inc., according to court filings.

Law Firm Adviser

Ropes & Gray worked as an adviser on the deal, the U.S. said. Cutillo also obtained inside information on the purchase of Avaya Inc. by TPG and private equity firm Silver Lake. His former law firm also advised on that deal, prosecutors said in court papers.

The SEC said Cutillo also provided information on deals involving Blackstone’s bid for Alliance Data Systems, as well as deals involving Avaya and 3Com.

“We are 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,” John Tuerck, a spokesman for Ropes & Gray, said in a statement. “We are moving quickly to protect our clients and are cooperating fully.”

Zvi Goffer used to work at Schottenfeld, the New York-based broker-dealer, before joining Galleon, where he worked from January to August 2008, according to the U.S. complaints. His alleged insider trading began before he joined Galleon, the government said.

Intercepted Calls

Zvi Goffer’s phone calls were being intercepted at Galleon almost as soon as he joined the hedge fund, according to the FBI. On Jan. 2, 2008, he had a call from Goldfarb, who had provided inside information on mergers the previous year. At Galleon, Goffer told him, his buying power was “more than three times bigger” than at his previous employer, according to the complaint.

That year, Zvi Goffer started operating Incremental Capital. His trading account at Schottenfeld showed a profit of about $156,000 in the trading of 19,000 shares of Kronos stock in March 2007, according to the court filings. The account also showed a profit of about $20,000 in the trading of Avaya call options in June 2007; a profit of about $354,000 in the trading of Hilton shares and call options in July 2007; and a profit of about $379,000 in the trading of 3Com stock between August and September 2007, according to the U.S. complaint.

Drimal’s trading account showed a profit of about $4.5 million in the trading of 3Com stock and about $1.9 million in the trading of Axcan stock, according to the complaint. The Federal Bureau of Investigation said his total insider profits exceeded $8 million.

Trading Profits

Emmanuel Goffer’s trading accounts showed a profit of about $353,000 in the trading of Kronos stock; about $1.7 million in the trading of Hilton stock; and about $723,000 in the trading of 3Com stock, the government said.

In addition to those arrested today, additional defendants named by the government include Deep Shah, a former analyst at Moody’s Investors Service, and Ali Hariri, a vice president of a unit of Atheros Communications Inc. Shah’s whereabouts are unknown, the U.S. said. Hariri was arrested today in California and is awaiting a court hearing there.

The U.S. alleged that Hariri leaked information on Atheros’ “downward” guidance on its financial performance for the quarter ending last December. A confidential witness in the case sold the company’s stock short as a result, prosecutors alleged.

The criminal case is U.S. v. Rajaratnam, 1:09-mj-02306, U.S. District Court, Southern District of New York (Manhattan).

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