The USAO in New York continues to unfold the results of its blockbuster insider trading investigation with an assist from the SEC. Overall, eight new defendants were charged, with five others having pleaded guilty. Three new criminal cases were brought, U.S. v. Goffer, Case No. 09 Mag 2438 (S.D.N.Y. Filed Nov. 4, 2009), U.S. v. Hariri, Case No. 09 Mag 2436 (S.D.N.Y. Filed Nov. 4, 2009) and U.S. v. Shah, Case No. 09 Mag 2437 (S.D.N.Y. Filed Nov. 4, 2009. Last month, the initial two other cases were filed, U.S. v. Rajaratnam, Case No. 09 Mag 2306 (S.D.N.Y. filed Oct. 15, 2009) and U.S. v. Chiesi, Case No. 09 Mag 2307 (S.D.N.Y. Filed Oct. 15, 2009), both of which are discussed here. Defendants in the new cases are alleged to have made trading profits of over $20 million. With the investigations continuing, it appears there will be more charges in the future.

The Goffer case names seven individuals as defendants: Zvi Goffer, a registered representative formerly employed at Schottenfeld Group and currently at Echotrade LLC; Arthur Cutillo, an attorney at Ropes & Gray; Jason Goldfarb, an attorney in private practice in New York; Craig Drimal, a trader formerly at Galleon Management and currently at Echotrade; Emanuel Goffer, a registered rep and trader formerly at Spectrum Trading and currently at Echotrade; Michael Kimelman, a trader formerly with Lighthouse Financial Group and currently at Echotrade; and David Plate, formerly at Schottenfeld and currently at G-2 Trading LLC, a registered broker dealer. The SEC has filed an action which essentially parallels this case (except it includes the entities and those who have pleaded guilty as discussed below). SEC v. Cutillo, Case No. 09-09208 (S.D.N.Y. Filed Nov. 4, 2009). See also Litig. Rel. 21283 (Nov. 5, 2009) and Litig. Rel 21284 (Nov. 5, 2009).

The criminal complaint details the operations of an insider trading ring headed by an individual known as “Octopussy” — that is, Zvi Goffer – because of his multiple sources of inside information. Two sources are identified in the complaint. One was ultimately Arthur Cutillo, an attorney at Ropes & Gray, who furnished information on corporate transactions in which his firm was involved. Mr. Cutillo funneled information through defendant Goldfarb. He is alleged to have misappropriated inside information on transactions involving Alliance Data Systems, Avaya Inc., 3Com Corporation and Axcan Pharma Inc. In each instance, the information concerned an upcoming corporate transaction. Typically, the information was funneled to Zvi Goffer who in turn furnished it to tippees including Messrs. Shankar (not named in this action, but in the parallel SEC case), Platt, Drimal, Goffer (his brother), Kimelman and two unidentified hedge fund advisers (referenced in the SEC complaint). Each defendant is alleged to have traded in the securities of the company involved and made a profit.

Many of the critical conversations regarding these transactions were taped, according to the complaint, by a confidential witness who worked at a hedge fund and is identified only as CS-1. That confidential source has agreed to a plea arrangement and has been working for the government since July 2007.

A second source of inside information is identified as CC-1. This source furnished inside information regarding transactions involving Kronos, Inc. and Hilton Hotels, both of which are involved in the initial criminal cases filed last month. The traders who received this information are alleged to have placed profitable trades in each instance. Portions of the telephone conversations involving these transactions were intercepted, according to the criminal complaint.

The Shah case involves trading in the securities of Hilton Hotels based on inside information. Here again, the information was supplied by a cooperating witness. Similarly, Hariri involved trading based on inside information about Atheros Communications which was supplied by a cooperating witness. Both of these securities were involved in the initial criminal cases filed last month.

Five defendants have pleaded guilty to criminal charges. These defendants include: 1) Steven Fortuna, formerly the Managing Director of S2Capital, a hedge fund. Mr. Fortuna pleaded guilty to a criminal information charging him with three counts of conspiracy to commit securities fraud and one count of securities fraud. 2) Richard Choo-Beng Lee, former president of Spherix, a hedge fund; and Ali Far, the founder of Spherix. Both men pleaded guilty to an information which contains one count of conspiracy to commit securities and wire fraud and one count of securities fraud. 3) Roomy Khan, previously identified in media sources as a confidential witness for the initial cases, pleaded guilty to an information charging one count each of conspiracy to commit securities fraud, securities fraud, and obstruction of justice. 4) Gautham Shankar, formerly a registered representative at Schottenfeld, pleaded guilty to conspiracy to commit securities fraud and securities fraud.

The SEC also amended its complaint in SEC v. Galleon Management, L.P, filed last month. The amended complaint adds thirteen new defendants including Roomy Khan, Deep Shah, Aki Far, Choo-Beng Lee, Far & Lee LLC, Spherix Capital LLC, Ali Hariri, Zvi Goffer, David late, Gautham Shankar, Schottenfeld Group LLC, Steven Fortuna and S2Capital Management LP. It alleges insider trading in twelve securities, two more than in the original case.

The new cases are clearly a continuation of the investigation which spawned the initial criminal and civil cases filed last month. As in those case, the new charges are built on wire taps, confidential witnesses, and tape recorded conversations. A review of the court papers lists at least several sources of inside information, not all of which have been identified to date. At the press conference the U.S. Attorney’s Office made it clear that their investigation into these matters is continuing. No doubt the confidential witnesses are hard at work as are those listening to the wire taps.

Finally, while the new cases were being filed and the USAO and SEC were holding another joint press conference Mr. Rajaratnam was in court today seeking a reduction in his bail. That request was denied, although the court did ease his travel restrictions.

Note: Generally on Friday we post This Week In Securities Litigation which recaps key events of the week. In view of the significance of these cases This Week will appear on Monday and return to its usual Friday slot next week.