Nov. 6 (Bloomberg) -- U.S. prosecutors charged 14 people, including hedge fund managers, lawyers and an ex-Galleon Group employee, for using the methods of “drug dealers” and “common criminals” to profit on insider data from deals involving firms such as 3Com Corp. and Alliance Data Systems Corp.

The charges, brought as part of a wide U.S. probe of Galleon founder Raj Rajaratnam, bring the illicit profits in the case to as much as $53 million. Five of those whose cases were unsealed yesterday have pleaded guilty and are cooperating in the investigation, prosecutors said.

At the center of a new insider trading ring are Zvi Goffer, 32, a former Galleon employee who sought tips, and Arthur Cutillo, 33, an attorney at Ropes & Gray LLP and the ring’s key source of information, federal officials said. Goffer, founder of Incremental Capital LLC, paid tipsters including Cutillo for information on mergers and acquisitions, giving them pre-paid mobile phones so they could avoid surveillance, the U.S. said.

The defendants behaved like “common criminals” who took a “page from drug-dealer handbooks,” Manhattan U.S. Attorney Preet Bharara said yesterday at a press conference. The probe is focused on hedge funds and their sources of information, he said, adding that more arrests may be coming.

As with Rajaratnam, investigators used wiretaps, data- mining and surveillance to target the ring. Authorities have struggled to build cases against large institutional investors such as hedge-fund managers, who often seek to deflect regulatory queries about suspiciously timed bets by arguing they’re statistical flukes amid millions of trades.

Largest Ever

“If you’re a wealthy trader, you aren’t special,” Bharara said, urging Wall Street professionals to come forward to disclose crimes. “Knock on our door before we come knocking on yours.”

Yesterday’s arrests add to last month’s charges against Rajaratnam, 52, and five others in what the government said was the largest hedge fund insider-trading ring ever prosecuted. The U.S. says Rajaratnam received tips from a network of high- ranking executives including co-defendants Rajiv Goel, who worked at Intel Capital, and Anil Kumar, who was a director at McKinsey & Co. All have denied any wrongdoing.

“We’re not just talking about aggressive hedge fund traders who were trying to get an edge,” Bharara said at the press conference. “Someone had to give them that illegal edge. It takes two to tango.”

Roomy Khan

Also arrested yesterday were Craig Drimal, 53, who worked at Galleon’s offices; Brooklyn, New York-based attorney Jason Goldfarb, 31; Zvi Goffer’s brother Emanuel Goffer, 31; Atheros Communications Inc. Vice President Ali Hariri; and Incremental Capital employees David Plate, 34; and Michael Kimelman, 38. Another man, Deep Shah, a former analyst at Moody’s Investors Service, remained at large.

Charges against the defendants include conspiracy and fraud. The eight people arrested yesterday, after appearing in federal courts in Manhattan and San Francisco, were released on bonds of $100,000 to $500,000.

Prosecutors disclosed yesterday that Roomy Khan, a former Intel Corp. employee, was among five people who pleaded guilty last month. Khan is a key government witness in the Rajaratnam case, a person familiar with the matter said. Khan, who was previously convicted of funneling tips to Galleon, earned $1.6 million in the latest scheme, according to court papers.

Khan’s lawyer, Stanislao German, didn’t return a call seeking comment.

‘Accepts Responsibility’

The others pleading guilty and cooperating with prosecutors are Steven Fortuna, a managing director at hedge fund S2 Capital in Boston; Gautham Shankar, 35, of New Canaan, Connecticut, a former trader at Schottenfeld Group LLC, where Zvi Goffer once worked; and Richard Choo-Beng Lee, a portfolio manager at an unidentified hedge fund. Lee and Ali Far, who also pleaded guilty, formed the hedge fund Spherix Capital.

“Fortuna has pled guilty and accepts responsibility for his conduct,” Richard Schaeffer, his lawyer, said in a phone interview.

Zvi Goffer, who now works at Incremental Capital, was at the heart of the scheme, prosecutors allege. He and others paid for secret tips and tried to hide their trades by having accomplices use prepaid telephones, they say. His attorney, Cynthia Monaco, declined to comment.

‘Octopussy’

Within the ring, Goffer was known as “the Octopussy,” a reference to the 1983 James Bond film starring Roger Moore, the U.S. Securities and Exchange Commission alleged in a related civil lawsuit filed yesterday. The nickname stemmed from his reputation for having multiple sources of inside information, the SEC said.

“There should be a moment -- hopefully before you’re holding a bag of cash delivered to you by somebody code-named ‘the Octopussy’ -- that causes anyone in a position to tip or trade on inside information to think twice before taking such a misguided step,” SEC Enforcement Director Robert Khuzami said at yesterday’s press conference.

Goffer gave one of his sources a disposable mobile phone before Bain Capital LLC’s proposed buyout of 3Com, authorities said. The phone had two programmed numbers labeled “you” and “me.” After the deal was announced, Goffer removed the phone’s SIM card, bit it, and broke the phone in half, they said.

“And if you find yourself chewing the memory card in your cell phone to destroy any record of your misconduct, something has gone terribly wrong with your character,” Khuzami said.

Cutillo passed news about deals Ropes & Gray was working on to Goldfarb, another New York lawyer, who gave it to Goffer, prosecutors said. Cutillo, who no longer works at the firm, got kickbacks for his tips on four deals including the purchase of Hilton Hotels Corp., authorities said.

‘Sad Mistake’

Cutillo’s lawyer, Bryan Blaney, said in an interview that his client did “nothing wrong. His being included in this was just a sad mistake we hope to quickly cure.”

“We are deeply disappointed to learn about this situation, which suggests an extreme breach of this person’s duty of trust,” John Tuerck, a spokesman for Boston-based Ropes & Gray, said in a statement. “We are moving quickly to protect our clients and are cooperating fully with authorities.”

The SEC, which said profits in the overall Galleon probe were as much as $53 million, filed a civil complaint against those arrested yesterday. Also sued was the Schottenfeld Group, a New York-based broker-dealer where several defendants works.

Schottenfeld Group said in a statement that it was “shocked by the criminal allegations” against some of its former employees and that it will cooperate with the government.

Wiretaps

Dan Gagnier, a spokesman for Galleon, declined to comment.

According to court papers, Zvi Goffer passed along the tips he got from Cutillo to Kimelman, Shankar, Plate, Drimal and his brother Emmanuel. Drimal and Shankar leaked the information to others, authorities said.

Declining to comment were Kimelman’s attorney Michael Sommer, Emmanuel Goffer’s lawyer Matthew Levine, Goldfarb’s attorney Harvey Greenberg, and Plate’s lawyer Frank Handleman. Drimal’s attorney JaneAnne Murray didn’t return a call seeking comment.

Wiretaps provided much of the government’s evidence, as it did in the Rajaratnam case. Investigators said in court papers that they tapped Drimal’s mobile phone. Zvi Goffer’s phone calls were intercepted at Galleon almost as soon as he joined the hedge fund, where he worked from January to August 2008, according to court papers.

‘Three Times Bigger’

On Jan. 2, 2008, Goffer had a call from Goldfarb, who had provided inside information on mergers the previous year. At Galleon, Goffer told him, his buying power was “more than three times bigger” than at his previous employer, according to the complaint.

The government’s cooperators pleaded guilty to crimes involving a series of leaks. Steven Fortuna, formerly the managing director of hedge fund S2 Capital, got tips about the quarterly earnings of a technology company, prosecutors said.

Le, the former president of California-based hedge fund Spherix Capital, and Far, the fund’s founder, admitted they paid kickbacks to their sources of inside information, prosecutors said. Shankar got tips from a friend and a trader at Schottenfeld and passed along the information, they said. Khan conspired with eight others on illegal trades, prosecutors said.

Far’s lawyer Steven Kobre, Lee’s lawyer Jeffrey Bornstein and Shankar’s lawyer Frederick Sosinsky also didn’t immediately return phone messages seeking comment.

The criminal case is U.S. v. Rajaratnam, 1:09-mj-02306, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: David Glovin in New York federal court at dglovin@bloomberg.net and; Bob Van Voris in New York federal court at rvanvoris@bloomberg.net; Joshua Gallu in Washington at jgallu@bloomberg.net.

Last Updated: November 6, 2009 00:01 EST