Federal prosecutors have filed criminal charges against 20 hedge fund managers, traders, corporate executives, and at least two lawyers in connection with the government's crackdown on insider-trading, report several news sources.
According to a criminal complaint filed against seven of those charged, the 33-year-old Cutillo is alleged to have provided inside information on three transactions on which Ropes advised private equity clients: TPG and Silver Lake's $8.2 billion acquisition of Avaya in June 2007, TPG's $1.3 billion acquisition of Axcan Pharma in November 2007, and Bain Capital's $2.2 billion acquisition of 3Com in September of that year. (Ropes is known for its strongprivate equity practice and has advised Bain and TPG on several high-profile deals, including a $17.9 billion buyout of radio giant Clear Channel and $28.1 billion sale of Alltel to Verizon last year.)
A Ropes spokesman released the following statement to The Am Law Daily: "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. We cannot comment in detail on an ongoing investigation but we are moving quickly to protect our clients and are cooperating fully with authorities." Cutillo's c.v. has been removed from the firm's Web site.
"It certainly sounds like this [probe] is widening," says Bradley Simon, a former federal prosecutor and founder of New York's Simon & Partners. "And while it's still unclear at this point how far and wide this thing permeates, if it involves a lawyer at a large firm there's no telling how far this will go. It's almost like a virus."
Another individual arrested in the investigation, Michael Kimelman, a trader and founding partner of Incremental Capital, previously worked as an associate at Sullivan & Cromwell. (Hat Tip: The Business Insider.)
According to a civil complaint filed by the SEC against Cutillo and six other defendants on Thursday, a third defendant, 31-year-old Jason Goldfarb, is an attorney in private practice in New York. New York State Bar Association records show only one lawyer with that name in private practice in Brooklyn--an associate at personal injury firmBrecher Fishman Pasternack Walsh Tilker & Ziegler. Sibling publication the New York Law Journal spoke with a name partner at the firm about the allegations against Goldfarb.
The SEC complaint was the second such complaint filed on Thursday related to insider trading. An amended civil complaint was also filed in the case against the Galleon Group hedge fund and its billionaire founder Raj Rajaratnam, charging alleged government informant Roomy Khan and 12 additional individuals and entities with participating in a $33 million insider trading scheme.
The two SEC complaints are separate but involve some individual overlap. Three individuals and one entity--employees of New York trading firm the Schottenfeld Group--charged in the amended Galleon complaint are also named in the Cutillo complaint. Sources familiar with the government's investigation say that while some of the individuals are the same, the alleged schemes themselves differed.
"The trading took place in different securities and there were different sources for the information," says one source, who requested anonymity. "These are two different matters that have been filed separately, but there is some overlap in the individuals involved." Adds another: "Some of these people had their fingers in both pies."
The SEC case in the Cutillo matter is being handled by lawyers in Washington, D.C., while the regulatory body's New York regional office is overseeing the Galleon case.
The government's criminal complaint against Cutillo reads at certain points like an episode of The Wire, with the defendants meeting in cars, paying each other off in cash, and using prepaid cell phones to pass tips to one another. Prosecutors claim that Cutillo was the focal point of an insider trading scheme that generated $53 million in illegal profits.
Both Cutillo and Goldfarb made appearances late Thursday before U.S. magistrate judge Theodore Katz in Manhattan. The New York Law Journal reports that Cutillo was represented by Bryan Blaney of Norris McLaughlin & Marcus in New York, while Goldfarb turned to Harvey Greenberg of New York's Greenberg & Wilner. Neither lawyer was immediately available for comment.
The use of wiretaps on individuals suspected of committing white-collar crimes continued to surprise some defense lawyers.
"Wiretaps are not frequently used because they are expensive, difficult to obtain, and time-intensive in terms of manpower and resources," says Michael Gurland, a former federal prosecutor and assistant district attorney in Manhattan who now cochairs the white-collar defense group at Chicago's Neal, Gerber & Eisenberg. "We usually see them being used in major drug and gang-related investigations, not insider trading cases that are usually built on an inference of guilt from circumstantial evidence like banking, trading, and phone records."
On Wednesday, lawyers for the SEC in the Galleon civil case told U.S. district court judge Jed Rakoff that prosecutors intended to charge more individuals with insider trading. Rakoff set December 15 as a deadline to add additional parties in the case. It appears law enforcement officials didn't need nearly that long, and prosecutors have stated publicly that their investigation is continuing.
"The funny thing about wiretaps is that I've never seen one where it didn't wind up picking something else," says Andrew Hruska, a member of the government investigations practice at King & Spalding and a former federal prosecutor. "Agents are supposed to stop listening to conversations if they don't have to do with the designated activity, but there is an exception if you hear people talking about unrelated criminal conduct. You can always get the [wiretap] application amended."
Manhattan assistant U.S. attorneys Andrew Fish, Reed Brodsky, and Marc Litt--a former Am Law Litigator of the Week for putting Bernard Madoff behind bars--are handling the Cutillo criminal case for the government.