US Federal authorities widened their crackdown on insider trading, uncovering an alleged network of conspirators with elements of a James Bond movie, including packages of money, throwaway cellphones, a ringmaster nicknamed “Octopussy” and an associate called “the Greek”.
In a 24-page criminal complaint filed in a New York federal court, prosecutors alleged that 14 individuals were part of an insider trading group that generated $20 million (around Rs94 crore) in illegal profits. The group allegedly included several hedge fund traders, two lawyers, a former junior analyst at a credit rating firm and a technology company executive. The charges mark a significant broadening of ongoing criminal and civil investigations into alleged insider trading on Wall Street, in Silicon Valley and elsewhere—the most sweeping insider trading case in decades.
Last month, charges were filed against hedge fund tycoon Raj Rajaratnam, founder of Galleon Group, and five others. Rajaratnam and his co-defendants, who were accused of reaping $20 million in illegal profits, have denied wrongdoing.
Some of the individuals charged on Thursday moved in the same circle.
In the complaint, the US alleged that Zvi Goffer, a former trader at Galleon and hedge fund Schottenfeld Group Llc, was the central figure in a ring that included his brother, a lawyer at Ropes and Gray Llp, and six other traders and hedge fund managers.
“The casual betrayal of corporate secrets by insiders...makes a mockery of our system,” said Preet Bharara, the Manhattan US attorney, at a news conference announcing the charges. A related civil case was filed by the Securities and Exchange Commission.
A lawyer for Goffer, who is 32 years old, declined to comment, as did a lawyer for his brother.
Rick Schottenfeld, founder of Schottenfeld Group, Goffer’s former employer, said: “We are deeply troubled and shocked by the criminal allegations” against Goffer. He added that no current Schottenfeld employees have been named in the case, and said the firm is cooperating with authorities.
Five of those charged on Thursday have already pleaded guilty and are helping prosecutors build a case, including three traders—Roomy Khan, C.B. Lee and Ali Far—previously identified by The Wall Street Journal as cooperating witnesses in the investigation.
The government alleges that the group affiliated with Goffer used non-public information to trade stocks of Avaya Inc., 3Com Corp., Alliance Data Systems Corp. and Axcan Pharma Inc. The complaint says the information included tips supplied by Arthur Cutillo, 33, an associate in the New York office of Boston-based Ropes and Gray, about buyout announcements involving those firms.
Jason Goldfarb, a Brooklyn lawyer, served as the intermediary between Cutillo and Goffer, the complaint says. The defendants allegedly used disposable cellphones to relay the information to one another. Lawyers for Cutillo and Goldfarb declined to comment.
A Ropes and Gray spokesman 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”. He said the firm was cooperating with the investigation.
Goffer was referred to by some people in the alleged ring as Octopussy because he “had arms in so many sources of inside information”, the complaint says. Octopussy is the title of a 1983 Bond film.
In one phone conversation recorded by federal agents, Goffer, apparently worried that a trade might attract attention, told one of his alleged co-conspirators: “Someone’s going to jail, going directly to jail, so don’t let it be you,” according to the complaint.
The government alleges that the defendants had knowledge of a pending acquisition of 3Com and bought shares of the computer networking company in August 2007.
After Bain Capital Llc announced its plans to buy 3Com in September 2007, the complaint alleges, Goffer broke a disposable cellphone in half and bit its “SIM” computer chip before telling an unidentified “tippee” to dispose of the other half of the phone.
In August, a government informant, wearing a wire, pushed Goffer to identify one of his alleged tipsters, whom Goffer had described earlier as “a guy in the construction business”, the complaint says. Goffer declined to elaborate, according to the complaint, telling the informant it was better for him not to know in case someone from the government were ever to ask.
The Goffer brothers discussed using the disposable cellphones to call someone they called “the Greek”, the complaint says. His identity couldn’t be determined.
Goffer, a New York City resident, had worked as a trader at Schottenfeld and Galleon before starting his own trading firm, Incremental Capital Llc.
The complaint says Cutillo of Ropes and Gray passed information to Goldfarb about at least four mergers on which Ropes and Gray was an adviser, including deals involving 3Com and Axcan. Ropes and Gray represented buyout firms, including Silver Lake Partners, TPG Capital and Bain Capital, the complaint says.
In the 3Com case, the government alleges that on 28 July 2007, Ropes and Gray sent a letter to 3Com indicating Bain Capital’s interest in acquiring the company.
On the evening of 6 August, the complaint says, Cutillo called Goldfarb six times, passing on information about the 3Com acquisition. That same night, Goldfarb passed on the information to Goffer, who then called his younger brother, Emanuel, 31, who began buying 3Com shares the following day, according to the complaint.
The 3Com deal, in which Bain Capital and China’s Huawei Technologies Co. Ltd had proposed buying the company, was abandoned in March 2008 due to opposition from a US government security panel.
One defendant, trader Craig Drimal—who allegedly made $2 million in illegal profit on the Axcan deal—said to Goffer in a phone call recorded by federal agents that another individual had “some cash lying around” and is “going to take care of me”, according to the complaint. A lawyer for Drimal declined to comment.
In another call, Drimal and Goffer agreed to meet on Manhattan’s Upper East Side, the complaint says. At about 2pm the following day, Federal Bureau of Investigation (FBI) agents allegedly observed Drimal arriving at the corner of First Avenue and 63rd Street in Manhattan, near Goffer’s residence. According to the complaint, they saw Goffer get into the car, then exit the car carrying “an item the size of the VHS tape”, which FBI believed was filled with cash, a kickback for a tip.
At 5:30 that evening, agents saw Goffer drive to the home of Goldfarb, where he entered the building carrying a white bag that the agents also believe was filled with money.
Also named as a defendant was Ali Hariri, a vice-president at Atheros Communications Inc., a Santa Clara, California, maker of wireless communications chips. Prosecutors allege that Hariri passed inside information related to forthcoming Atheros earnings to an investor who worked at a hedge fund, who made $870,000 trading on the information.
A spokesman for Atheros said, “The company has launched an internal investigation, and placed Hariri on leave pending the results of that investigation and the unfolding legal proceedings.” Hariri couldn’t be reached for comment.
THE WALL STREET JOURNAL
Don Clark, Chad Bray, Gregory Zuckerman and Justin Scheck also contributed to this story.