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* Sentences include deterrent element, says judge
* Milestone in fight against in insider dealing - FSA
By Huw Jones
LONDON July 27 (Reuters) - Six members of an illegal UK trading ring that netted 732,000 pounds ($1.15 million) were jailed on Friday for what the judge described as deliberate, planned and dishonest insider share dealing, marking another coup in the regulator's crackdown.
The four-and-a-half-month trial cost the UK's Financial Services Authority (FSA) 5 million pounds -- the longest and most complex prosecution to date in its "credible deterrence" drive against market abuses.
"You knew precisely what you were doing," Judge Jeffrey Pegden told Southwark Crown Court in London, adding that an element of deterrence was included in the prison terms because of the time-consuming nature of such cases.
"Insider dealing is not a victimless crime," he said. "Those involved are criminals, no more, no less."
The convicted six betrayed the principles of confidentiality and trust that are essential to the operation of the commercial world, he added.
The case marked a strategic push into so-called digital forensics, whereby experts use the latest technology to sift through emails, telephone records and computers.
"This is another significant milestone in our fight against insider dealing," Tracey McDermott, the FSA's acting director of enforcement, said in a statement.
Last month the FSA said that a fifth of company announcements in Britain were still preceded by unexplained share price movement, indicating possible insider trading.
The judge praised the watchdog's meticulous and exhaustive investigation and sentenced Ali Mustafa, who obtained confidential information on planned mergers from where he worked in the print room of UBS, to three and a half years in prison.
"You stole information from your employer," the judge said.
Pardip Saini and Paresh Shah were also sent down for three and a half years. The judge said that Saini played a vital role in distributing the stolen information.
Neten Shah, a former company director and accountant whose involvement was said by his defence to be more limited, was jailed for 18 months. Bijal Shah and Truptesh Patel, two day-traders, were imprisoned for two years each. The six were convicted on Monday.. The Shahs are related.
The FSA has placed protection orders on large homes located in north London belonging to some of the defendants. Confiscation of assets and costs will be dealt with later.
Ali Mustafa's brother, Ersin, who worked in the print room of JPMorgan Cazenove, was also involved but failed to turn up for a police interview during the investigation. The trial was told that he was living in northern Cyprus.
Jerome Lynch, speaking for Ali Mustafa, said that he would not have been in trouble were it not for his brother.
Information on mergers was passed to Pardip Saini, a friend of Ersin Mustafa, who shared it with the rest of the ring via a password-accessed website.
"The offences are not in the premier league," said John Charles Rees, speaking on behalf of Saini.
UBS and JPMorgan Cazenove declined to comment on Friday.
The day-traders used information from the "drop box" to place spreadbets on 500 different stocks. The ring used 130 trading accounts, usually in third-party names, making it hard initially to identify the culprits.
FSA officials briefing reporters on the case said that they began seeing a pattern of unusual trading activity in 2006 and made a key breakthrough the following year to reveal the links.
Saini had placed a spreadbet on Reuters in May 2007 after receiving a text message from Ersin Mustafa a few minutes earlier. Thomson was preparing a bid for Reuters at the time. Thomson Reuters made no comment on Friday.
The FSA saw that Ersin was print room manager of JPMorgan Cazenove and his brother Ali worked in the UBS print room, links that enabled the watchdog to uncover other members of the ring.
It culminated in raids and arrests in July 2008, when a search of Paresh Shah's home uncovered a wealth of evidence.
"It was like walking into Aladdin's cave," Owen Brady, an FSA official specialising in digital forensics, told reporters.
They found notes on dealings and a computer memory stick with confidential documents from UBS, complete with code names that the bank had been using to identify companies involved in mergers, such as Temple for Thomson and Robson for Reuters.
In all, 500 different stocks were traded using inside information, including Vega, Biffa, Premier Oil, Enodis and Thus.
The FSA sifted through 250,000 emails and 375,000 lines of telephone data, and checked 15,000 news stories to show that the traders could not have obtained the information from the press.
The FSA said that the case for Ersin Mustafa, described in the trial as a bodybuilder and part-time model, remains open.
FSA officials emphasised that they have no criticism of the two banks involved, adding that no specific rule changes were envisaged. McDermott said that the FSA would visit the banks in due course to see how lessons from the trial could be applied.