Zeev's Turnips Patch-No Politics (ZEEV)

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Schottenfeld Draws Scrutiny After Goffer Arrest in Insider Case
http://www.bloomberg.com/apps/news?pid=20601103&sid=apx0o7rJ_yyQ
By James Sterngold, Cristina Alesci and Saijel Kishan
(shocker, these people conduct premeditated white collar crimes? They involve lawyers, prop traders, mutual funds, company executives and PR officials in their schemes?) Don't know what melon cart prosector Bahrara tumbled off of, but he might just call old Elliot Spitzer to get a little schoolin' on the "games these people play".

Nov. 6 (Bloomberg) -- Schottenfeld Group LLC, the firm where three of the people arrested yesterday on insider-trading charges worked, said it was “deeply troubled and shocked” by the allegations against its former employees.

It wasn’t the first time the New York-based company has had to react to allegations of impropriety by its traders. In April 2008, former employee Paul Berliner settled charges he spread false rumors that private-equity firm Blackstone Group LP was about to cut its offer for Alliance Data Systems Corp.

“There is no place at our firm for individuals who violate the securities laws,” Schottenfeld’s chairman, Richard Schottenfeld, said in an April 2008 statement.

Zvi Goffer, a Schottenfeld trader from January 2007 through December 2007, is at the center of the government’s latest charges in a case that has so far ensnared six firms and at least 20 people allegedly involved in insider trading. He was known within the ring as “the Octopussy,” a reference to the 1983 James Bond film starring Roger Moore, “because he had arms in so many sources of information,” according to a U.S. Securities and Exchange Commission complaint.

Schottenfeld is a “prop shop,” or proprietary-trading firm, where about 50 traders buy and sell stocks daily using company money. They keep a portion of any profits they make. Unlike a hedge fund, there is no unified strategy or investment committee; each trader makes his own decisions.

The firm was started in 2003, and at least three of those named by the government yesterday spent some time working there together: Goffer, 32, David Plate, 32, and Gautham Shankar, 35, according to civil and criminal complaints filed yesterday.

High Turnover

Turnover at Schottenfeld, on the 10th floor of 800 Third Ave. in Midtown, was high, as traders who lost money left within days or weeks, according to a former employee, who asked that his name not be used.

In January 2008, Goffer moved to Galleon Group LLC, helped by one of his co-conspirators, Craig Drimal, 53, a professional trader. Drimal had previously worked at Galleon, a hedge-fund firm that managed $7 billion in 2008. Drimal continued to work out of Galleon’s offices on New York’s Madison Avenue after ending his employment there.

Drimal walked away with the largest share of the profits earned by Goffer’s insider-trading ring, according to the government’s complaint.

U.S. prosecutors last month charged Galleon co-founder Raj Rajaratnam, 52, and five others in what the government said was the largest hedge fund insider-trading ring ever prosecuted. Rajaratnam, who is free on bail, has said he is innocent.

Wiretaps

In that case, and in yesterday’s arrests, the government investigators relied on phone taps and cooperating witnesses, some of whom wore hidden recording devices.

“Why do we have to resort to wiretaps and other methods traditionally reserved for the mob and narcotics traffickers,” U.S. Attorney Preet Bharara said at a news conference in Manhattan yesterday. “Some of the defendants, taking a page from the drug dealers playbook, deliberately used anonymous, hard-to-trace, prepaid cell phones to avoid law enforcement detection.” The defendants also discussed falsifying company records and taking other steps to avoid getting caught, he said.

“When sophisticated business people begin to adopt the methods of common criminals, we have no choice but to treat them as such,” said Bharara.

The FBI’s phone taps in the case started on Nov. 16, 2007, and ran until March 6, 2008, according to the complaint. In addition, an unnamed cooperating witness, referred to as CS-1, held meetings with Goffer and others wearing a hidden recording device, the complaint said.

Link to Lawyer

Prosecutors and the SEC said Goffer’s network of co- conspirators traded on information that originated in several instances with Arthur Cutillo, a lawyer at Ropes & Gray LLP. The Boston-based law firm represented private-equity firms TPG Inc. and Silver Lake in their 2007 leveraged buyout of Basking Ridge, New Jersey-based Avaya Inc., the world’s largest maker of equipment for corporate phone networks. It also represented Bain Capital LLC in its attempt to acquire 3Com Corp., a Marlborough, Massachusetts-based network-equipment maker, in 2007.

Cutillo provided his tips to Jason Goldfarb, 31, an attorney in private practice in Brooklyn, who passed the information to Goffer, prosecutors say. Goffer allegedly shared the information with five people, including his brother Emmanuel Goffer, 31, a trader at Spectrum Trading, Shankar, Plate, 34, who worked at Schottenfeld, Michael Kimelman, 38, a trader at Lighthouse Financial Group and later Echotrade LLC and Incremental Capital LLC.

Of the people named who worked together at Schottenfeld, Shankar, 35, agreed to plead guilty to securities fraud on Oct. 20.

Kickbacks

Declining to comment were Kimelman’s attorney Michael Sommer, Emmanuel Goffer’s lawyer Matthew Levine, Goldfarb’s attorney Harvey Greenberg, and Plate’s lawyer Frank Handleman. Drimal’s attorney JaneAnne Murray didn’t return a call seeking comment.

Plate also tipped off an unnamed relative who earned $97, 502, according to the criminal complaint, which says that all the trades earned $11 million in profits.

In return for the tips, the conspirators paid kickbacks, according to prosecutors.

FBI agents observed Goffer as he received a packet, believed to be cash, from Drimal in an exchange near the corner of First Avenue and 63rd Street on the upper east side of Manhattan, according to the complaint. Goffer then met Goldfarb nearby and passed him the packet, which was about the size of a VHS tape, according to the complaint. The exchanges took place in November 2007.

Hilton Hotels

The complaint alleges that they traded in five stocks involved in takeovers, Avaya, 3Com, Axcan Pharma Inc., Kronos Inc. and Hilton Hotels Corp. It mentions that there were discussions about another stock, Dallas-based Alliance Data Systems, which was involved in a takeover. No details of any possible trades in the stock are provided in the complaint.

That was the same stock involved in an unrelated complaint last year against a different Schottenfeld trader. Paul Berliner paid $156,000 in April 2008 to settle claims that he spread false rumors by messaging traders at brokerages and hedge funds in November 2007 about Blackstone’s bid for Alliance Data Systems.

Berliner sought to profit by claiming Alliance Data’s board was meeting to discuss a reduced offer by New York-based Blackstone because of problems in Alliance Data’s credit-card bank, according to the SEC.

After yesterday’s arrests, Schottenfeld released a statement that said none of the people involved in the criminal case were current employees. Schottenfeld itself is a defendant in the SEC’s civil suit.

‘Deeply Troubled’

“We are deeply troubled and shocked by the criminal allegations made today against former employees of our firm,” Schottenfeld’s statement said. “These individuals have not been affiliated with the firm for nearly two years.”

Prosecutors said that after the 3Com deal was done, and the traders had made their money, that Zvi Goffer removed the SIM card from his disposable cell phone and destroyed it by biting it in half.

“There should be a moment -- hopefully before you’re holding a bag of cash delivered to you by somebody codenamed ‘the Octopussy’ -- that causes anyone in a position to tip or trade on inside information to think twice before taking such a misguided step,” SEC Enforcement Director Robert Khuzami said at a press conference yesterday. “And if you find yourself chewing the memory card in your cell phone to destroy any record of your misconduct, something has gone terribly wrong with your character.”

The criminal case is U.S. v. Zvi Goffer et al, 1:09-cv- 09208-LAK, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: James Sterngold in New York at [e-mail]; Cristina Alesci in New York at [e-mail]; Saijel Kishan in New York at [e-mail]