Galleon defendant leads US to more arrests

NEW YORK (Reuters) - Richard Choo-Beng Lee is rapidly turning into the government’s most valuable witness.

The former hedge fund manager led authorities to four more arrests in the latest hedge fund insider trading scandal on Thursday, court documents show.

Lee has helped federal authorities in at least two of the largest insider trading cases in history since he pleaded guilty in the insider-trading prosecution of Galleon Group hedge fund founder Raj Rajaratnam and 22 others last year.

He may prove more helpful to authorities than Roomy Khan, a co-defendant in the Galleon case who told prosecutors about several co-conspirators.

Lee’s cooperation is a classic example of how prosecutors build cases: using evidence against relatively obscure people to pressure them to testify against higher-profile people.

“If you identify one person who you can turn, and get them to start cooperating, then you’ll often use them to link to a whole series of participants in a larger scheme,” said Michael Malloy, a law professor and former special counsel for enforcement policy at the U.S. Securities and Exchange Commission.

Prosecutors last year released a copy of Lee’s wide-ranging cooperation agreement, which he signed in October 2009. The agreement says he will provide authorities with evidence of alleged insider trading he may have engaged in while working at other hedge funds.

Lee, 54, was a co-founder of the Spherix Capital hedge fund which he closed in early 2009, and has worked at Steven Cohen’s $12 billion Connecticut hedge fund SAC Capital and another hedge fund, Statrix Capital Management. He lives in San Jose, California.

In April 2009, Lee began cooperating with authorities after he was contacted by a Federal Bureau of Investigation agent, according to a court filing that was unsealed late last year.

The former hedge fund manager was “consensually recording phone calls” with potential suspects until a week before authorities arrested Rajaratnam, according to that filing.

Lee’s cooperation began shortly after he and Spherix’s other co-founder, Ali Far, closed their 18-month old fund in early 2009.

Lee and Far agreed in January to pay a combined $2.1 million to settle a Securities and Exchange Commission civil complaint against them in the Galleon probe, in which they admitted to sometimes paying for inside information.

According to his cooperation agreement, Lee could have been involved in various insider trading schemes since as early as 1994, suggesting he was engaged in insider trading well before setting up Spherix in 2007.

Lee’s cooperation also led to the arrest last month of Don Chu, a former employee of the California “expert network” firm Primary Global Research, on securities fraud and conspiracy charges.

Chu introduced Lee to a Primary Global Research consultant from Taiwan at an industry conference in Las Vegas in early 2009, according to the complaint filed in a New York federal court and unsealed on Thursday.

Lee also met Mark Anthony Longoria, a Round Rock, Texas employee of Advanced Micro Devices who was arrested on Thursday, at the same conference in Las Vegas, according to the complaint.

Lee and Longoria had a business relationship before Lee began cooperating with authorities, the complaint said.

Prosecutors have described the Galleon case as the biggest investigation of insider trading at hedge funds in the United States.

Lee’s lawyer, Jeffrey Bornstein, said his client continues to cooperate with the United States government to the best of his ability. Bornstein said he has not seen the latest complaint.

Prosecutors to sue Ernst & Young over Lehman collapse

BANGALORE (Reuters) - Prosecutors in New York are set to file civil fraud charges against accounting firm Ernst & Young LLC over the collapse of Lehman Brothers Holdings Inc, the Wall Street Journal said, citing people familiar with the matter.

The suit, led by Andrew Cuomo, could come as early as this week and may seek to impose fines and other penalties, the paper said.

No one at Ernst & Young was available for comment outside regular U.S. business hours. Andrew Cuomo’s office could not be reached for comment.

The lawsuit stems from Lehman’s use of a controversial accounting technique called Repo 105, the paper said.

Lehman’s court-appointed examiner, Anton Valukas, has said that the use of Repo 105, which dated back to 2001 and was used without telling investors or regulators, gave the appearance that Lehman was reducing its overall leverage levels in 2008 when it was not.

Lehman used Repo 105 to temporarily remove $50 billion of assets from its balance sheet in 2008, according to his report released in March.