Nov. 6 (Bloomberg) -- When Bain Capital LLC said it would buy 3Com Corp. for 44 percent more than the stock price, one unexpected beneficiary was Arthur Cutillo, an associate at the Ropes & Gray LLP law firm advising the private-equity company, according to the FBI.

Cutillo owned part of a 75,000-share 3Com stake bought using information he passed on ahead of the 2007 deal in exchange for kickbacks, according to court documents accusing the lawyer of securities fraud. The stock was sold at a profit before Boston-based Bain, whose affiliates run $60 billion in assets, backed away from the deal, the FBI said in a criminal complaint.

Cutillo, 33, was one of 14 people charged yesterday as part of a probe of an alleged $20 million insider-trading scheme. Cutillo, one of those arrested yesterday, “fueled” the fraudulent trades by a ring led by Zvi Goffer, founder of Incremental Capital LLC, by selling nonpublic information about mergers his law firm advised on, prosecutors alleged.

“That’s the ultimate betrayal of trust,” said Peter Henning, a legal ethics professor at Wayne State University Law School in Detroit and a former federal prosecutor. “The cornerstone of the legal profession is the attorney-client privilege; what you say to your lawyer is sacrosanct. If it happened, there couldn’t be any clearer violation of legal ethics rules.”

Cutillo, a 2005 graduate of Villanova University law school, leaked information about at least four acquisitions or bids in 2007, according to a criminal complaint filed by the FBI. Cutillo gave the information to a friend, New York lawyer Jason Goldfarb, 31, who passed along the tips to Goffer, the FBI said.

The Firm’s Clients

Ropes & Gray’s clients in the transactions, Bain Capital and TPG Capital, are among the best-known private-equity firms. TPG Capital is a buyout group of TPG, based in Fort Worth, Texas, which is run by David Bonderman and James Coulter, with $45 billion in assets under management.

Besides the 3Com deal, Ropes & Gray that year advised Silver Lake and TPG Capital on their purchase of Avaya Inc., which offered shareholders a 28 percent premium over the trading price 10 days earlier, prosecutors said.

The firm again provided advice to TPG Capital when the company bought Axcan Pharma Inc. for 28 percent more than the trading price. They also advised on the failed purchase of Alliance Data Systems Corp. by client Blackstone Group. Cutillo provided tips on all four, according to a civil complaint by the U.S. Securities and Exchange Commission, which sued him.

Cutillo, with a master’s and a bachelor’s degree in chemical engineering, was an intellectual property litigator for Ropes & Gray, according to a biographical sketch on the firm’s Web site.

IP Experts

The firm’s intellectual property attorneys, who are experts on patent, trademark and copyright law, provided advice on due diligence and technical aspects of mergers and acquisitions, according to the site. The deals included Bain’s planned 3Com purchase and Silver Lake and TPG’s $8 billion acquisition of Avaya, two deals that Cutillo is accused of providing tips on, according to the site and prosecutors.

IP attorneys can gain access to confidential deal documents if they advise on these transactions, M&A lawyers say.

“The people on the front lines are the M&A lawyers, but in the background are all these other practice areas, including IP, who are also essential to the deal,” said Brian Hoffmann, an M&A attorney at law firm Clifford Chance LLP.

Calls to Cutillo’s home in Ridgewood, New Jersey, weren’t answered and Cutillo’s phone number at Ropes & Gray was disconnected.

“Disappointed”

“We are 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,” Ropes & Gray said in a statement. The firm is cooperating with prosecutors, it said.

Bain spokesman Alex Stanton and Owen Blicksilver, a TPG spokesman, declined to comment.

Goffer worked at the brokerage Schottenfeld Group LLC, at the time of the alleged insider trades in 2007, prosecutors said. He later moved to Galleon Group, whose founder Raj Rajaratnam was accused Oct. 16 of being the leader of another insider-trading ring.

Goffer paid tipsters like Cutillo for information on mergers and acquisitions, and gave them pre-paid mobile phones to try to avoid detection, taking a page from drug dealers’ tactics, the government said.

Confidential Source

Knowledge of Cutillo’s role in the Goffer ring was garnered from a “confidential source” wearing a hidden recording device, intercepted phone calls, phone records and other means, prosecutors said.

Toll records and pen register data from June to October 2007 showed frequent calls had been made between phones used by Cutillo and Goldfarb, including “days of significance” relating to 3Com, prosecutors said.

Intercepted phone calls confirmed Cutillo’s role in leaking inside information. Early in 2008, Goffer asked Goldfarb to get information on whether the 3Com deal would close. Goldfarb referred in the conversation to Cutillo as “Artie.”

The criminal case is U.S. v. Goffer, 09-mag-02438, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Carlyn Kolker in New York at ckolker@bloomberg.net; Linda Sandler in New York at lsandler@bloomberg.net.

Last Updated: November 6, 2009 00:01 EST