NEW YORK (Reuters) - Fourteen people were charged with fraud and conspiracy in a dramatic widening of an insider trading scandal that has ensnared hedge fund managers, top Silicon Valley executives and a bevy of white-shoe advisers.
In complaints that read like scripts for the TV series “The Sopranos,” prosecutors alleged suspects dropped off bags full of cash, used prepaid cellphones to dodge wiretaps, and used nicknames such as “the Greek.”
“As we allege, some of the defendants -- taking a page from the drug dealer’s playbook -- deliberately used anonymous, hard-to-trace, prepaid cellphones in order to avoid detection by law enforcement,” 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.
The latest charges involve some of the same companies and individuals implicated in the Galleon Group insider trading scandal that broke three weeks ago. It was not clear whether the illegal networks were linked.
“People will probably ask just how pervasive is insider trading these days? Is this just the tip of the iceberg?” Bharara said. “We don’t have an answer to that yet but we aim to find out.”
In the largest branch of the investigation unveiled on Thursday, Zvi Goffer, manager of New York-based trading firm Incremental Capital, was accused of leading an insider trading ring that netted $11 million.
Prosecutors said they had uncovered illegal profits of more than $20 million -- on top of the $20 million that authorities say was pocketed by the Galleon group.
The Galleon case is already the biggest hedge fund insider trading scheme in Wall Street history, and in Thursday’s complaint one of the suspects admitted to years of insider trading apparently overlapping with his time at a former job at SAC Capital, perhaps the nation’s best-known hedge fund.
Raj Rajaratnam, the billionaire founder of the Galleon Group and accused mastermind of an illegal insider trading operation, is free on $100 million bail. On Thursday, he lost a bid to get bail reduced, although a U.S. magistrate judge did ease restrictions on his travel within the United States.
The Galleon case is turning into one of the biggest insider trading rings since the Ivan Boesky scandals of the 1980s. The Boesky case capped off a gilded age for Wall Street and ultimately brought down Drexel Burnham Lambert. The current case follows last year’s financial meltdown that erased fortunes on Wall Street and Main Street alike.
The aggressiveness of the investigation came in marked contrast to years of failure by U.S. regulators to spot the massive Ponzi scheme masterminded by Bernard Madoff.
“The regulatory cops are saying in a very loud voice, ‘we’re back on the beat,'” said Michael Holland, founder of Holland & Co in New York.
Participants with access to inside information, including a lawyer, a former Moody’s analyst and an executive with a wireless networking firm, were charged with leaking confidential information about takeovers and other activities.
Prosecutors introduced a new group of suspects on Thursday, including Goffer, who previously worked at Galleon, and Michael Kimelman, an Incremental Capital co-founder who was a former Sullivan & Cromwell merger and acquisition attorney.
Participants with access to inside information, including a lawyer, a former Moody’s executive and an executive with a wireless networking firm, were charged with leaking confidential information about takeovers and other activities.
The basis of the scheme was to make trades using insider information on upcoming mergers, some of it gathered from a lawyer at the firm of Ropes & Gray, Arthur Cutillo, who was arrested.
Calls recorded by law enforcement officials were littered with nicknames, like the Greek and the Rat, and jokes about getting information from a guy fixing a pothole. Current and past targets were code-named the Hilton Hit and the Apple.
”Someone’s going to jail, going directly to jail, so don’t let it be you, OK?“ Goffer said, according to a criminal complaint. ”That’s a ticket right to the (expletive) Big House.
Also arrested were Jason Goldfarb, an attorney; Craig Drimal, who worked in Galleon’s office; and Emanuel Goffer -- Zvi’s brother -- and David Plate, both also associated with Incremental Capital.
The complaints allege Zvi Goffer, 32, paid sources for inside information. He provided his tipsters with prepaid cellphones so they could minimize the chances of getting caught when passing along tips, the complaint said.
Zvi Goffer worked at Schottenfeld, a New York-based broker dealer, for nearly all of 2007, the complaint said. He moved to Galleon in 2008, where he worked for about eight months before quitting to start Incremental Capital.
It was not the first time Schottenfeld was alleged to have been caught up in trading on deal rumors. A former trader at the firm settled SEC charges that he spread a false rumor that private equity firm Blackstone Group LP was trying to cut its proposed price for Alliance Data Systems Corp.
The deal eventually fell apart because of regulatory issues.
Zvi Goffer’s scheme involved shares of network equipment maker 3Com Corp, telecom equipment maker Avaya Inc and drugmaker Axcan Pharma Inc, according to the complaint.
Separately, prosecutors charged Deep Shah, a former employee of ratings firm Moody’s Corp, and Ali Hariri, a vice president at wireless networking chipmaker Atheros Communications Inc, with leaking confidential information as part of insider trading schemes.
Hariri, 38, was arrested in San Francisco, while Shah, 27, resides in India, prosecutors said.
A spokesman for the U.S. Attorney’s Office declined comment on whether prosecutors would seek Shah’s extradition.
Moody’s spokesman Michael Adler said Shah had not worked at the company since 2007.
“Moody’s has strict policies against divulging confidential information, and any alleged wrongdoing by an individual at Moody’s would be an egregious violation of Moody’s policies and values,” he said, adding that the ratings agency fully supported the probe and would do whatever it could to help.
Another five individuals who were previously charged have pleaded guilty to insider trading charges, prosecutors said, including current or former executives of hedge funds S2 Capital and Spherix Capital LLC. Also pleading guilty was Roomy Khan, a convicted felon and former Intel employee cited as a cooperating witness in the Galleon probe.
Ali Far, the founder of Spherix, a California-based hedge fund, and Richard Choo-Beng Lee, its former president, have admitted to engaging in illegal insider trading for many years, according to their cooperation agreements.
In the case of Lee, the agreements suggest that he engaged in illegal insider trading while working at Steven Cohen’s SAC Capital, the Connecticut-based hedge fund.
SAC did not immediately response to a call seeking comment.
Writing by Steve Eder and Christian Plumb; Additional reporting by Anupreeta Das, Steve Eder and Dan Wilchins in New York and Svea Herbst-Bayliss in Boston; Editing by John Wallace, Gary Hill