4th UPDATE: 14 Charged In Insider-Trading Investigation

The Federal Bureau of Investigation confirmed Thursday that agents had taken seven people into custody, including individuals in New York, New Jersey and Connecticut. Preet Bharara, the U.S. Attorney in Manhattan, is expected to discuss the case in more detail at a press conference at noon EST Thursday.

The charges outlined in three criminal complaints against nine of the individuals include insider trading and conspiracy and revolve around tips about pending mergers and acquisitions.

The individuals charged include Zvi Goffer, the founder of Incremental Capital and a former employee at Galleon and Schottenfeld Group; Arthur Cutillo, an intellectual property lawyer at Ropes & Gray LLP; Jason Goldfarb, another New York attorney; Craig Drimal, who worked in Galleon's office space, but wasn't employed by the firm; former Moody's analyst Deep Shah; Atheros executive Ali Hariri; and several individuals associated with Incremental Capital: Emanuel Goffer, Michael Kimelman, David Plate.

In court documents, prosecutors alleged Zvi Goffer operated an "insider trading network" through which he received material, nonpublic information regarding mergers and acquisitions and then traded on it, and passed it on to his co-conspirators.

"There is probable cause to believe that Zvi Goffer and his co-conspirators obtained and used for securities transactions inside information concerning mergers and acquisitions in which Ropes & Gray played a role," the complaint said.

Some of the alleged trades were made on information similar to that obtained and traded on by Rajaratnam, including the announcement of an acquisition of Hilton Hotels Corp. by Blackstone Group LP (BX) in July 2007.

Cutillo allegedly gave the inside information to another lawyer, Goldfarb, who then passed it onto Zvi Goffer.

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

The acquisitions include the 2007 deal with 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 in its failed bid to acquire 3Com Corp (COMS).

Like the Galleon case, investigators have intercepted telephone conversations with Goffer and recorded conversations with a cooperating witness in which Zvi Goffer or Drimal allegedly discussed how they received inside information on pending deals or discussed profits from the deals, according to the complaint.

Prosecutors have pointed to the use of wiretaps in the Galleon case as an important step forward in pursuing insider trading crimes.

In December 2007, Zvi Goffer allegedly met with the cooperating witness in attempt to recruit that person to join Incremental Capital, according to court papers. During the conversation, Zvi Goffer allegedly told the cooperating witness that his source - a childhood friend - gave him details about four deals, including 3Com, according to the complaint.

However, Zvi Goffer allegedly told Drimal in an intercepted telephone conversation from his cellphone that he was leading the cooperating witness " away from where Goffer really got the information," according to the complaint. The cooperating witness, who isn't identified, has agreed to plead guilty to criminal charges in hopes of receiving a lesser sentence.

Zvi 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.

A Galleon spokesman didn't immediately comment. A person answering the phone at Incremental Capital said the firm had "no comment at this time."

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."

3Com President and Chief Operating Officer Ron Sege said the company hasn't worked with Ropes & Gray since he joined the company a little more than a year ago, and declined to comment. The law firm was an adviser in Bain Capital Partners' attempt to acquire 3Com early last year, which ultimately fell apart due to U.S. government scrutiny.

A Securities and Exchange Commission spokesman declined comment.

In a separate complaint, prosecutors alleged that Shah, the former Moody's analyst, provided insider information to a cooperating witness - believed to be Roomy Khan - about Blackstone's acquisition of Hilton. Khan is a hedge-fund manager who briefly worked for Galleon in the late 1990s.

Prosecutors also alleged that Hariri, who was vice president of Atheros broadband carrier networking business, provided inside tips to a cooperating witness about the company's plans to revise its earnings guidance downward in December 2008.

The cooperating witness is described as a California hedge fund manager. However, it's unclear if the cooperating witness is the same one used in the other cases.

Wiretaps of the cooperating witness's phone were part of the Hariri case.

-By Chad Bray, Dow Jones Newswires; 212-227-2017; chad.bray@dowjones.com

(John Kell, David Benoit, Joseph Checkler, Roger Cheng and Joe Bel Bruno contributed to this report.)

  (END) Dow Jones Newswires
  11-05-091218ET
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