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Manhattan U.S. Attorney Charges 14 Defendants with More Than $20 Million in Insider Trading
Charged Defendants Include Hedge Fund Managers,
Trading Firm Executives, Lawyers, and Corporate Insiders;
Five Already Have Pleaded Guilty To Insider Trading Charges
PREET BHARARA, the United States Attorney for the
Southern District of New York, and JOSEPH DEMAREST, JR., the
Assistant Director-in-Charge of the New York Office of the
Federal Bureau of Investigation ("FBI"), today announced charges
against 14 additional Wall Street professionals and attorneys
arising out of their ongoing investigation of insider trading at
hedge funds and stock trading firms. The charged defendants
include hedge fund managers and trading firm executives, lawyers,
and corporate insiders. Five of the charged defendants
previously pleaded guilty to insider trading charges in Manhattan
federal court. The defendants collectively are charged with
allegedly participating in insider trading schemes that generated
more than $20 million in illegal profits.
From left: New York FBI Supervisory Special Agent David Chaves, Assistant Special Agent in Charge Peter Groupe, Special Agent in Charge David Cardona, and representatives of the U.S. Securities and Exchange Commission and the Southern District of New York, along with U.S. Attorney Preet Bharara and FBI Assistant Director in Charge Joseph Demarest (at podium).
On October 16, 2009, six individuals were arrested for
their alleged involvement in the largest hedge fund insider
trading case in history. The criminal investigation, which was
led by the United States Attorney's Office for the Southern
District of New York and the FBI, working in close coordination
with the United States Securities and Exchange Commission
("SEC"), employed various investigative techniques including the
analysis of information from the SEC, business records obtained
from relevant entities, court-authorized pen register and telephone toll records, consensually-recorded conversations
between cooperating sources and others, and court-authorized wire
taps on various telephones.
The following eight defendants were arrested earlier
today:
1. ZVI GOFFER, who formerly worked at The Schottenfeld
Group LLC ("Schottenfeld"), a broker dealer in New York, New
York, and currently operates a trading firm called Incremental
Capital ("Incremental"), in New York, New York;
2. ARTHUR CUTILLO, an attorney at the law firm of Ropes
& Gray LLP in New York, New York;
3. JASON GOLDFARB, an attorney in New York, New York;
4. CRAIG DRIMAL, who worked in the offices of the
Galleon Group ("Galleon"), in New York, New York, but is not
employed by Galleon;
5. EMANUEL GOFFER, who formerly worked at Spectrum
Trading LLC, a trading firm in New York, New York, and currently
is associated with Incremental in New York, New York;
6. MICHAEL KIMELMAN, currently associated with
Incremental in New York, New York;
7. DAVID PLATE, formerly employed by Schottenfeld, and
currently associated with Incremental in New York, New York; and
8. ALI HARIRI, a Vice President of Atheros
Communications, Inc. ("Atheros") in California.
A ninth charged defendant, DEEP SHAH, who was formerly employed
by Moody's Investors Service, Inc. ("Moody's"), in New York, New
York, remains at large.
ZVI GOFFER, JASON GOLDFARB, EMANUEL GOFFER, and DAVID
PLATE were arrested at their homes in New York, New York. ARTHUR
CUTILLO was arrested at his home in Ridgewood, New Jersey. CRAIG
DRIMAL was arrested at his home in Weston, Connecticut. MICHAEL
KIMELMAN was arrested at his home in Larchmont, New York. ALI
HARIRI was arrested in San Francisco, California. All of the
defendants except HARIRI are expected to be presented in
Manhattan federal court later today; HARIRI is expected to appear
in San Francisco federal court later today.
The five defendants who were previously charged and
have pleaded guilty in Manhattan federal court to insider trading
crimes are:
1. STEVEN FORTUNA, formerly a Managing Director of S2
Capital LLC ("S2 Capital"), a hedge fund based in Boston,
Massachusetts;
2. ALI FAR, founder of Spherix Capital LLC ("Spherix"),
a hedge fund based in California;
3. RICHARD CHOO-BENG LEE, former President of Spherix;
4. ROOMY KHAN, a California trader who served at
certain times as a paid consultant to a hedge fund based in New
York, New York; and
5. GAUTHAM SHANKAR, a proprietary trader at
Schottenfeld in New York, New York.
According to the Complaints and Informations unsealed
today in Manhattan federal court:
The 9 Defendants Charged Today In Criminal Complaints
The Goffer Insider Trading Network
ZVI GOFFER operated an insider trading network through
which he obtained, passed to others, and traded on material,
nonpublic information (the "Inside Information") regarding
mergers and acquisitions of public companies. In exchange for
the Inside Information, ZVI GOFFER and others paid sources for
the Inside Information. In an unsuccessful effort to conceal
their fraudulent schemes, ZVI GOFFER and his co-conspirators used
prepaid telephones to share the Inside Information.
One of GOFFER's sources of Inside Information was a
Ropes & Gray attorney, ARTHUR CUTILLO. In violation of his duty
of confidentiality to his law firm and its clients, CUTILLO
provided Inside Information about several mergers and
acquisitions of public companies for which Ropes & Gray was
providing legal services prior to the public announcements of the
deals. CUTILLO allegedly stole Inside Information about the
following acquisitions: Avaya, Inc. ("Avaya"); 3Com Corporation
("3Com"); and Axcan Pharma, Inc. ("Axcan"). CUTILLO provided the
Inside Information concerning these companies to JASON GOLDFARB,
another New York attorney, who in turn passed the Inside
Information to ZVI GOFFER and other co-conspirators. In exchange
for providing the Inside Information to GOFFER and his network,
CUTILLO and GOLDFARB received cash payments.
ZVI GOFFER and his co-conspirators also obtained Inside
Information from another co-conspirator about the acquisition of
Kronos, Inc. ("Kronos"), and Hilton Hotels Corp. ("Hilton") prior
to the public announcements of those deals.
According to the Complaint, on September 4, 2007, CRAIG
DRIMAL provided an individual with a piece of paper listing the
stock symbols of four companies and disclosed that 3Com was going
to be acquired. DRIMAL told that individual to destroy the list
and to be careful trading in these securities because there were
no public rumors that the companies on the list were acquisition
targets. The next day, DRIMAL told that individual that he did
not want to talk about the four stocks on the list over the
telephone but said that it was "like shooting fish in a barrel."
During the course of the Government's investigation,
the Government used wiretaps to obtain critical evidence against
ZVI GOFFER and his illegal insider trading network. Some of the
intercepted calls show that ZVI GOFFER and his co-conspirators
used prepaid telephones and that they tried to disguise their
criminal conduct by collecting research reports and other
publicly available data to justify their transactions in the
event that they were scrutinized by regulators. For example,
during a February 18, 2008, intercepted call, ZVI GOFFER
instructed MICHAEL KIMELMAN:
PF Changs just had earnings and they all put
out research reports the next day. There's
like eight of them out there . . . . So you
know you print all those out . . . get
everything printed out, because if we're going
to make a big trade and make a big bet and it
works . . . it's always good to have that on
file why you did it.
Wire interceptions also showed that ZVI GOFFER and his
co-conspirators were conscious of the fact that they would go to
jail if they were caught. For example, during a February 20,
2008, intercepted call with GOLDFARB, ZVI GOFFER expressed
concern over someone's purchase of a large number of options on a
particular stock: "[T]hey paid a nickel for them. . . . You know
what that means? Someone's going to jail, going directly to jail
so don't let it be you, okay?" Later, ZVI GOFFER reiterated:
"That's a ticket right to the [expletive] big house." GOLDFARB
confirmed to ZVI GOFFER that he had not purchased the options, and ZVI GOFFER responded: "Good, better that way. Better that
way. Perfect. All right then, you know what? All it does is
give me more cover."
As a result of their trades of hundreds of thousands of
shares of stock based on the Inside Information that CUTILLO,
GOLDFARB, and others provided them -- including trades in 3Com,
Avaya, Axcan, Kronos, and Hilton -- ZVI GOFFER, DRIMAL, EMANUEL
GOFFER, KIMELMAN, and DAVID PLATE earned profits of at least
approximately $11 million for themselves and their firms.
The Ali Hariri Complaint
Between 2008 and March 2009, ALI HARIRI, a Vice
President at Atheros, provided Inside Information to a
cooperating witness who managed a hedge fund in California in
exchange for advice received from that cooperating witness about
the purchase and sale of other securities. The cooperating
witness caused the hedge fund to execute securities transactions
in Atheros stock based on the Inside Information, realizing
hundreds of thousands of dollars of profits.
The Deep Shah Complaint
Between 2006 and July 2007, former Moody's analyst DEEP
SHAH provided Inside Information concerning Hilton, a client of
Moody's, to a cooperating witness in exchange for a cash payment
of $10,000, with the understanding that the cooperating witness
would use the Inside Information to engage in securities
transactions. Specifically, on July 2, 2007, SHAH told the
cooperating witness that Hilton was going to be taken private the
following day. The cooperating witness purchased Hilton
securities the day SHAH provided that information and the next
day, and later sold those securities for a profit of $630,000.
The cooperating witness then arranged to pay SHAH $10,000 in
cash. In 2006 and 2007, SHAH provided Inside Information
concerning Adesa, Inc., and Kronos, to the cooperating witness.
The cooperating witness realized profits of approximately $37,000
from the Inside Information concerning Kronos.
The Five Defendants Who Have Pleaded Guilty
The Steven Fortuna Information
On October 20, 2009, FORTUNA pleaded guilty to a
criminal Information charging him with three counts of conspiracy
to commit securities fraud and one count of securities fraud.
Between July 2008 and March 2009, STEVEN FORTUNA, formerly the Managing Director of hedge fund S2 Capital, in three separate
conspiracies, conspired with four individuals: (1) the Managing
Director of a hedge fund based in New York, New York; (2) a
Managing Director of S2 Capital; (3) an analyst for a hedge fund
based in Chicago, Illinois; and (4) the manager of a hedge fund
based in Boston, Massachusetts. Among other things, FORTUNA
obtained Inside Information concerning the quarterly earnings of
a technology company and the plans of a semiconductor company to
spin off its manufacturing operations into a separate entity.
Based on that Inside Information, FORTUNA executed trades which
netted profits of approximately $2.4 million for S2 Capital.
FORTUNA obtained the Inside Information from a co-conspirator who
provided the information because s/he was his friend and because
FORTUNA provided him/her with trading advice about other
technology companies.
The Ali Far and Richard Choo-Beng Lee Informations
On October 13 and 19, respectively, RICHARD CHOO-BENG
LEE, former President of California-based hedge fund Spherix, and
ALI FAR, founder of Spherix, pleaded guilty to criminal
Informations each charging one count of conspiracy to commit
securities fraud and wire fraud and a substantive count of
securities fraud. FAR and LEE both admitted to conspiring with
each other as well as employees of several publicly traded
technology companies and individuals employed by hedge funds in
New York, New York and elsewhere. LEE also admitted to
conspiring to commit insider trading with an employee of a
California investor relations firm and individuals associated
with three other hedge funds. FAR and LEE compensated certain of
their sources of Inside Information with cash payments each
fiscal quarter and with Inside Information about other companies.
FAR and LEE used the Inside Information that they received to
earn profits and/or avoid losses in excess of approximately
$5 million in one or more brokerage accounts affiliated with
Spherix.
The Roomy Khan Information
On October 19, 2009, ROOMY KHAN pleaded guilty to a
criminal Information charging one count each of conspiracy to
commit securities fraud, securities fraud, and obstruction of
justice. KHAN lived in California, where she traded securities
on her own behalf, and also served as a paid consultant to a
hedge fund located in New York, New York. From 2004 through
November 2007, KHAN conspired with, among others: (1) an
executive at a technology company headquartered in California;
(2) an analyst at a credit ratings agency located in New York, New York; (3) an individual who worked at an investor relations
firm located in California; (4) the manager of a hedge fund
located in New York, New York; (5) the manager of another hedge
fund located in New York, New York; (6) a portfolio manager for a
hedge fund; (7) the President and principal portfolio manager of
a hedge fund located in California; and (8) the Managing Director
at a hedge fund located in New York, New York. KHAN compensated
certain of her sources of Inside Information by giving them other
Inside Information, cash, and/or by executing trades in their
personal brokerage accounts. KHAN also admitted to deleting an
incriminating e-mail that she had received from a co-conspirator
and attempted to deter other co-conspirators from sending
incriminating e-mails or instant messages in light of the thenpending
SEC investigation. KHAN profited approximately $1.6
million as a result of her insider trading.
The Gautham Shankar Information
GAUTHAM SHANKAR pleaded guilty on October 20, 2009, to
conspiracy to commit securities fraud and securities fraud.
SHANKAR received Inside Information from a friend in advance of
the publicly announced acquisitions of Kronos and Hilton.
SHANKAR also received Inside Information from a proprietary
trader at Schottenfeld in advance of the publicly announced
acquisitions of Avaya, 3Com, and Axcan. SHANKAR shared the
Inside Information, collected cash payments for certain of the
Inside Information, and, along with his co-conspirators, used the
Inside Information to execute profitable securities transactions.
SHANKAR made hundreds of thousands of dollars in profits from his
insider trading.
Mr. BHARARA praised the work of the FBI and thanked the
United States Securities and Exchange Commission for its
assistance in the investigation. Mr. BHARARA also noted that the
investigation is continuing.
United States Attorney PREET BHARARA said: "When we
announced our first arrests three weeks ago, I said this case
should be a wake-up call for Wall Street. Today the alarm bells
have only grown louder. Over the last three weeks, we have
charged 20 defendants with more than $40 million worth of alleged
insider trading, and our investigation is ongoing. When criminal
activity is your business model, business as usual has to stop."
FBI Assistant Director JOSEPH M. DEMAREST JR. stated: "Insider trading is like betting on a game when you already know the outcome. But if you traffic in inside information, there's
always a chance the person you conspire with is working for us.
If you talk on the phone, we may be listening. Insider trading
provides an illegal competitive edge over honest players in the
hedge fund business. Our job is to ensure a level playing field
through enforcement and deterrence."
These cases are being supervised by the Office's
Securities and Commodities Fraud Task Force. Assistant United
States Attorneys ANDREW L. FISH, REED M. BRODSKY, MARC LITT,
JOSHUA KLEIN, and JONATHAN R. STREETER, and Special Assistant
United States Attorney ANDREW MICHAELSON are in charge of the
prosecutions.
The charges contained in the Complaints are merely
accusations, and the defendants are presumed innocent unless and
until proven guilty.
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