The US Justice Department has charged 14 people and arrested eight of them in a widening insider trading investigation that centres on several major private equity deals.
The justice department, working in concert with the Federal Bureau of Investigation, alleges that Zvi Goffer, a former employee of embattled hedge fund Galleon Group, was the leader of an “insider trading network” that allegedly made $20 million trading on inside information about a number of private equity transactions. Galleon Group, at the centre of the probe, has begun winding down its funds.
Eight individuals have been arrested in connection with the most recent charges, including Ropes & Gray attorney Arthur Cutillo, who allegedly passed on tips about pending deals backed by clients of the Boston-based law firm.
Director of enforcement Robert Khuzami said during a press conference Thursday that Goffer was called “Octopussy” by agents because “he had his arms in so many insider” trading schemes.
Goffer allegedly worked with other defendants in the network to secure inside information. For example, Cutillo allegedly fed information about three private equity deals on which Ropes & Gray was an advisor to Jason Goldfarb, a person in Goffer's network. The deals involved were Silver Lake's and TPG Capital’s acquisition of Avaya in June 2007; Bain Capital Partners’ failed acquisition of 3Com and TPG Capital’s acquisition of Axcan in November 2007.
A member of the insider trading network told an FBI informant during a wiretapped phone conversation that Cutillo was paid cash in exchange for providing information, according to the complaint.
Cutillo joined Ropes & Gray in 2005, and practiced in the firm’s litigation department, focusing on intellectual property. Before, he worked at pharmaceutical giant Merck.
Other deals under scrutiny in the investigation include Hellman & Friedman's buyout of Kronos in March 2007, and The Blackstone Group's acquisition of Hilton Hotels in July 2007. An insider, who is being kept anonymous in the complaint, allegedly gave Goffer information about the transactions.
Much of the information in the suit was provided by an FBI informant who wore a wiretap in meetings with Goffer and his associates. The FBI also tapped Goffer’s cell phone, and the cell phones of a number of his associates. Goffer and his associates also made frequent use of prepaid cell phones to avoid detection, according to the complaint.
Goffer worked at broker-dealer the Schottenfeld Group from January 2007 until December 2007, and was an employee of hedge fund Galleon Group from January 2008 to August 2008.
At some time in 2008, Goffer established a trading firm called Incremental Capital as a vehicle for his trading activities, where he employed several other members of the network: David Plate, who worked at Schottenfeld from June 2006 to March 2008; Michael Kimelman, and Emanuel Goffer, who worked at hedge fund Spectrum Trading from January 2007 to November 2007. Emanuel Goffer is Zvi Goffer’s younger brother.
Craig Drimal previously worked in Galleon’s office space, although he was “not employed by Galleon”, the complaint states.
Five other defendants have already pleaded guilty: Steven Fortuna, formerly a Managing Director of S2 Capital, a hedge fund based in Boston; Ali Far, founder of Spherix Capital, a hedge fund based in California; Richard Choo-Beng Lee, former President of Spherix; Roomy Khan, a California trader who occasionally served as a paid consultant to a hedge fund based in New York; and Gautham Shankar, a proprietary trader at Schottenfeld in New York.
The new charges are the latest chapter of a larger insider trading scheme that has been unfolding since October. Initially the investigation centered on Raj Rajaratnam, managing member of hedge fund Galleon Management, who was said to be running an insider trading scheme that benefited his firm. His network included various sources at companies, hedge funds and investor relations firms, including Intel, IBM, McKinsey, Moody’s Investors Service, and Polycom. The companies on which the defendants allegedly traded inside information include Polycom, Google, Clearwire, Akamai, Advanced Micro Devices, People Support and Hilton Hotels.