UPDATE 2-Lazard ex-banker charged with insider trading

* Former fraternity brothers charged with tipping friends

* Traded on deals including $44 bln TXU buyout, suit says

* TPG internal statement voices dismay at alleged breach (Recasts to include criminal charges, adds details about deals, criminal charges, New York dateline, byline, information from internal TPG statement)

By Svea Herbst-Bayliss and Megan Davies

BOSTON/NEW YORK Dec 16 (Reuters) - U.S. prosecutors filed criminal charges against a former Lazard Freres banker on Wednesday for alleged insider trading that earned him and others $500,000 in illegal profits.

The trading involved some of the highest profile deals during the leveraged buyout boom of 2005 to 2007, including the buyout of TXU Corp, as it was formerly known, for $44 billion, including debt.

The charges were brought against Adnan Zaman, a former vice president at Lazard Freres, in federal court in San Francisco.

Financial regulators also filed civil charges against him and Vinayak Gowrish, a former associate at private equity firm TPG Capital, saying the one-time fraternity brothers stole confidential stock tips and then passed them on to friends. In return, the men received cash kickbacks.

The U.S. Securities and Exchange Commission settled the civil case with Zaman, who agreed to return $78,456 in ill-gotten gains and to be permanently barred from associating with any financial broker or dealer.

The SEC said that Gowrish and Zaman, friends since high school, tipped two friends, Pascal Vaghar and Sameer Khoury. Vaghar and Khoury also settled with the SEC.

The case is the latest in a series of insider trading probes that first made headlines two months ago, when hedge fund manager Raj Rajaratnam and others were arrested and accused of earning millions from illegally obtained information.

Gowrish claims he is innocent and is fighting the civil charges, and was not charged criminally, his lawyer said. Lawyers for Zaman, Vaghar and Khoury declined to comment.

Confidential deal information is not just another commodity that can be traded for profit," Robert Khuzami, director of the SEC's enforcement division, said in a statement. "These financial professionals betrayed their firms and clients to make some easy money with their friends, and they tried to cover their tracks to no avail."

LAZARD 'DEEPLY DISAPPOINTED'

"We are deeply disappointed that a former employee of ours allegedly violated the law and breached Lazard's policies and values. We do not tolerate any breach of client confidentiality and have fully cooperated with the authorities in their investigation of this matter," Lazard Freres spokeswoman Judi Frost Mackey said in a statement.

TPG's founders expressed "dismay and outrage" about the news in an internal statement obtained by Reuters.

"This alleged breach of the law and violation of our firm's policies, if true, is deplorable and is an affront to each and every member of the firm," co-founder Jim Coulter told staff in the statement, adding that TPG would "not tolerate even the appearance of impropriety."

TPG declined comment.

RISKY BETS

Using inside information, the men bet on biopharmaceutical company Myogen when biotechnology giant Gilead purchased it in October 2006, sending Myogen's share price up 47 percent, the SEC said in the lawsuit, which was filed in federal court in San Francisco.

The men also used illegally obtained information to make bets that online travel services company Sabre would be acquired by TPG and private equity firm Silver Lake in December 2006, the SEC said.

Gowrish also tipped his friend at Lazard that the private equity firm was ready to buy energy company TXU, the SEC said. Zaman then passed the information to Vaghar and Khoury. The men then watched TXU's share price climb 13 percent after TPG, Kohlberg Kravis Roberts & Co and GS Capital Partners bought TXU.

Lazard and TPG had written policies that barred disclosing confidential information, which those employees were aware off and agreed to abide by, the lawsuit said.

Zaman and Gowrish were savvy in trying to avoid detection by exchanging information on yellow sticky notes and through coded text messages, the SEC said. Zaman told Vaghar to trade in small chunks so that regulators would not become suspicious. (Editing by Richard Chang and Steve Orlofsky)