New York – FBI Arrest 7 in Insider Trading Probe

New York – The U.S. Department of Justice on Thursday filed criminal charges against 14 people for their alleged involvement in a continuing probe of insider trading in the hedge-fund industry.

The Federal Bureau of Investigation has taken seven people into custody surrounding the probe. The New York office of the FBI said the individuals were primarily taken into custody in New York.

See complaint here

The charges involve current and former employees at Galleon Group, law firm Ropes & Gray LLP and Incremental Capital, and primarily involve insider trading activities related to several mergers and acquisitions.

The complaint alleges former Galleon and Shottenfeld Group LLC employee Zvi Goffer, and at least six other defendants knowingly conspired to defraud, make untrue statements and omit facts, as well as engage in fraudulent and deceitful acts. Mr. Goffer allegedly operated an insider-trading network, obtaining nonpublic information about companies’ planned merger and acquisitions.

Mr. Goffer would then allegedly use the information to execute profitable securities transactions and provide inside information to other conspirators to earn similar profits. It is also alleged that Mr. Goffer provided the co-conspirators with prepaid cellphones so they could reduce the chances of law-enforcement detection.

Insider-trading activity was suspected in the 2007 acquisition of Avaya Inc. Avaya agreed to a merger with Silver Lake and TPG Capital, which were legally advised by Ropes & Gray. The firm also legally advised Bain Capital Partners LLC, which acquired 3Com in 2007.

The complaint alleges there was probable cause to believe Mr. Goffer and his conspirators engaged in insider trading in the acquisitions of Kronos Inc. and Hilton Hotels Corp.

Mr. Goffer worked at Schottenfeld from about January 2007 to December of that year. He then worked at Galleon until August 2008 and started an operating trading firm called Incremental Capital around that same time.

Other defendants included employees currently associated with Incremental Capital, as well as an attorney with Ropes & Gray, Arthur Cutillo. He is listed as an intellectual property lawyer in Ropes & Gray’s litigation practice. Mr. Cutillo is based in New York, and joined the firm in 2005 after working at Merck & Co., according to his biography on the law firm’s Web site.

A spokesman for Ropes & Gray said the firm was “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. We cannot comment in detail on an ongoing investigation but we are moving quickly to protect our clients and are cooperating fully with authorities.”

The arrests follow criminal charges last month against Raj Rajaratnam, founder of hedge-fund Galleon Group, and five others in a $20 million insider-trading case.

A Galleon spokesman didn’t immediately have a comment and a Securities and Exchange Commission spokesman declined comment.