Two lawyers were among several people arrested Thursday in a rapidly expanding hedge fund insider trading scandal.
Arthur J. Cutillo, 33, allegedly gave information about mergers and acquisitions he gleaned as an associate at Ropes & Gray to Jason Goldfarb, 31, an associate with the personal injury firm Brecher Fishman Pasternack Walsh Tilker & Ziegler. Prosecutors said that Mr. Goldfarb then passed the tips to the head of a ring who based trades on the information.
Mr. Cutillo, of Ridgewood, N.J., and Mr. Goldfarb, of New York, were both charged with conspiracy to commit insider trading and securities fraud.
Mr. Goldfarb and Mr. Cutillo made their initial appearances before Magistrate Judge Theodore H. Katz late yesterday.
Mr. Goldfarb is represented by Harvey L. Greenberg of Greenberg & Wilner, who declined comment after the proceeding.
Mr. Cutillo is represented by Bryan Blaney of Norris McLaughlin & Marcus.
"We're going to defend it," Mr. Blaney said afterward.
Messrs. Cutillo and Goldfarb were named in one of several charging documents revealed yesterday by Southern District U.S. Attorney Preet Bharara. They are part of the second wave of a scandal that broke three weeks ago with the arrest of Raj Rajaratnam, head of the hedge fund Galleon Management, and five others.
All told, Mr. Bharara announced eight criminal complaints and the arrests of 14 people, which brings the total of those arrested in the insider trading scandals to 20.
"When we announced our first arrests three weeks ago, I said this case should be a wake up call for Wall Street," Mr. Bharara said at a press conference. "Well, today the alarm bells have only grown louder."
According to the Securities and Exchange Commission, the arrests this morning and three weeks ago involved more than $53 million in illegal insider trading profits.
Of the 14 arrests announced Thursday, Mr. Bharara said five defendants had been previously charged, have pleaded guilty and are cooperating with prosecutors.
Messrs. Cutillo and Goldfarb were charged as part of the insider trading network allegedly headed by Zvi Goffer, 32, a broker-dealer formerly with The Schottenfeld Group and now with Incremental Capital in New York.
Mr. Goffer is purportedly known among his ring as "Octopussy" because he had his arms in so many companies with inside information.
Mr. Cutillo allegedly gave information to Mr. Goldfarb on several mergers and acquisitions involving public companies that Ropes & Gray was advising, including Axcan Pharma Inc., Avaya Inc. and 3Com Corp.
Mr. Goldfarb, in turn, gave that information to Mr. Goffer. Both Messrs. Goldfarb and Cutillo are accused of receiving cash payments for the tips and an FBI agent charges he witnessed a cash drop between Mr. Goffer and Mr. Goldfarb in New York City.
Using the information obtained from the two attorneys as well as other inside information obtained on Kronos Inc. and Hilton Hotels Corp., the Goffer group traded hundreds of thousands of shares.
'Money to Be Made'
Mr. Goldfarb was allegedly caught on a government wiretap talking with Mr. Goffer on Jan. 2, 2008, with Mr. Goffer saying, "We are gonna do things the same way but on a bigger scale," and to tell "our friends" to "follow the 3Com thing very closely because there is money to be made either way."
Mr. Goldfarb, according to the complaint, tells Mr. Goffer he is "pissed" because they should have had "two more in the [expletive] bag" and said that one of their associates "spooked Artie," a reference to Mr. Cutillo.
During a Feb. 20, 2008 call, Mr. Goffer tells Mr. Goldfarb he is concerned that someone had purchased a conspicuous number of options on a 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?" Mr. Goffer says.
Later, Mr. Goffer tells Mr. Goldfarb, "That's a ticket right to the [expletive] big house."
Mr. Goldfarb is allegedly heard confirming that he had yet to purchase the options and Mr. Goffer responds, "Good, better that way. Better that way. Perfect. All right then, you know what? All it does is give me more cover."
Ropes & Gray released a statement through a spokesman on the arrest of Mr. Cutillo. "We are deeply disappointed about this situation, which suggests an extreme breach of this person's duty of trust to our clients and to the firm," the statement reads. "We cannot comment in detail on an ongoing investigation but we are moving quickly to protect our clients and are cooperating fully with authorities."
Jordan Ziegler, a partner at Brecher Fishman, said Mr. Goldfarb's employment status at the firm "is unknown at this moment."
"It has nothing to do with our firm at all," Mr. Ziegler said. "What the allegations are that I read had nothing to do with the type of law we practice or the relationship to our clients. This is a personal matter....We found out about it today when the press called."
Disposable Phones
Authorities allege Mr. Goffer used disposable cell phones with programmed numbers and gave them to his tippees with the numbers labeled "you and me."
At one point, after an acquisition had been announced, Mr. Goffer removed the memory card from the phone, bit it, broke the phone in half, threw away one half and then instructed his tippee to throw away the other half.
Robert Khuzami, director of the SEC's Division of Enforcement, commented on this procedure at yesterday's press conference.
"There are certain moral truths that are self evident, and 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 provide inside information, to think twice before taking such a misguided step."
"And if you find yourself chewing the memory card of your cell phone to destroy your record of the conversation, something has gone terribly wrong with your character," he said.
Also charged in the Goffer ring were Craig Drimal, 53, of Weston, Conn., who worked at the offices of Galleon but was not employed by them; Emanuel Goffer of New York City, formerly of Spectrum Trading and now associated with Incremental in New York; Michael Kimmelman, 38 of Larchmont, a trader and founding partner of Incremental Capital who previously worked as an associate at Sullivan & Cromwell; and David Plate, 34 of New York City, once with Spectrum and now with Incremental.
Also charged were Ali Harari, 38, of San Francisco, a vice president of Atheros Communications Inc. and Deep Shah, 27, of India, a former employee of Moody's Investors Service Inc., who remains at large.
The five cooperators are Steven Fortuna, 47, formerly a managing director of S2 Capital LLC in Boston; Ali Far, 38, the founder of the California-based hedge fund Spherix Capital LLC; former Spherix president Richard Choo-Beng Lee, 53, of San Jose, Calif.; Roomy Khan, 51, of Fort Lauderdale, Fla., a paid consultant who allegedly fed information to Galleon; and Gautham Shankar, 35 of New Canaan, Conn., a proprietary trader at Schottenfeld in New York.
@|Mark Hamblett can be reached at mhamblett@alm.com. Nate Raymond can be reached at nraymond@alm.com.
