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Hedge fund insider-trading scandal expands

One man snapped his cellphone in half and bit the memory card to conceal his actions, complaints allege. Fourteen more are charged in the continuing investigation.

November 06, 2009|Walter Hamilton

NEW YORK — As an eavesdropping-detection specialist, Kevin D. Murray normally works for companies concerned about possible spying by competitors.

But since a blockbuster insider-trading prosecution built on wiretaps and microphone-wearing informants became public last month, frantic hedge fund managers have raced to hire him.

"The nature of the question is 'Can you tell me if the government's bugging me?' " Murray said, adding that he turned down the three firms that approached him.

Two years ago, hedge fund managers were acclaimed as financial whizzes, envied and even grudgingly respected for raking in gobs of money with daredevil investment strategies.

Now the hedge fund industry, facing public scorn in the wake of the financial crisis and still reeling from steep investment losses last year, is at the center of the biggest insider-trading scandal in a generation, pitted against prosecutors who are moving aggressively to stamp out what they fear is widespread abuse of confidential information on Wall Street.

The scandal expanded Thursday as federal prosecutors filed criminal charges against 14 people, bringing the number charged in the continuing probe to 20.

The criminal complaint and a companion civil lawsuit filed Thursday depict an insider-trading network brazenly swapping information about planned corporate mergers and taking such elaborate steps to avoid detection that authorities likened the methods to those used by narcotics traffickers. To build their case, authorities used informants, wiretaps and a stakeout on a Manhattan street corner, the court filings show.

A key figure in the charges is Zvi Goffer, a former employee of New York hedge fund firm Galleon Group. Other defendants allegedly referred to him as "Octopussy" -- a reference to a 1983 James Bond film -- because, according to the complaints, he got confidential information from numerous sources.

Goffer used disposable cellphones to hide his actions and after finishing with one of them, broke it in half, bit its memory card, threw away half of the phone and instructed another defendant to dispose of the other half elsewhere, the complaints allege.

"If you find yourself chewing the memory card in your cellphone to destroy any record of your misconduct, something has gone terribly wrong with your character," Securities and Exchange Commission enforcement chief Robert Khuzami said at a news conference.

According to the complaints, Goffer and another defendant, Craig Drimal, paid money for inside information, primarily from Arthur Cutillo, an attorney at Boston-based law firm Ropes & Gray, which worked on several mergers. Drimal worked in Galleon's office but was not employed by the firm.

Authorities staked out a meeting on an Upper East Side street corner at which Drimal gave an envelope stuffed with cash to Goffer, who subsequently passed money to Jason Goldfarb, another lawyer charged in the case, the filings say.

Goffer and Goldfarb worried about getting caught if their profits seemed to come too easily, according to the complaints.

"Someone's going to jail, going directly to jail, so don't let it be you," Goffer allegedly told Goldfarb in a secretly recorded call.

The complaints filed Thursday came less than three weeks after the government brought charges against Galleon's billionaire founder, Raj Rajaratnam, and five others. Rajaratnam was accused of conspiring with executives at major companies such as Intel Corp. and IBM Corp. to swap tips on mergers and other market-moving news. Prosecutors declined to say whether Rajaratnam and Goffer traded tips with each other.

Illicit profits from the conduct alleged in the charges filed last month and Thursday total about $53 million, according to the SEC, which brought the civil charges.

"It is absolutely stunning that such a massive criminal scheme was perpetrated by such elite members of the financial services industry," said Chris Bebel, a former federal prosecutor.

Five of the 14 new defendants pleaded guilty Thursday, including Roomy Khan, considered to be a key government witness in the case against Rajaratnam. Lawyers for the other defendants could not be reached for comment.

Rajaratnam is free on $100-million bail. His request to have the bail reduced to $25 million was denied Thursday by a federal judge.

The federal probe -- especially its use of electronic surveillance -- has rattled the hedge fund industry.

"You're seeing a panicked effort to escape detection," said Ted Siedle, head of investment consulting firm Benchmark Financial Services, who said he knew of funds trying to hire experts to comb their offices and phones for listening devices.

Other firms, meanwhile, are hiring lawyers and investigators to check out their employees and their sources of information to ensure they aren't violating the law.

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