In a brilliant move, a former Disney employee and her boyfriend were arrested this morning in Los Angeles for allegedly trying to sell insider information regarding the media giant to various hedge funds for $15k a pop. Bonnie Hoxie, who worked as an assistant in Disney’s communications department, according to Dealbreaker, and her boyfriend, Yonni Sebbag sent unsolicited emails to hedge funds asking for cash in exchange for insider information about earnings and Disney’s plan to sell ABC to two PE firms. (The news about ABC, which the New York Post hinted at earlier this week, has already caused a jump in Disney’s stock.)

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According to FINalternatives, former Millenium Partners hedge fund manager Renato Negrin, who the Securities and Exchange Commission alleges made $1.2 million four years ago trading on non-public information about a bond offering from Dutch media company VNU Group, took the stand in his own defense and denied any wrongdoing. This is the first ever insider-trading scandal involving credit default swaps (CDS).

According to the SEC, Negrin was given inside information by Deutsche Bank Securities CDS salesman Jon-Paul Rorech, his co-defendant. Negrin and Rorech are arguing that the SEC does not have jurisdiction over CDS because they are contracts, not securities.

Neither Millennium nor Deutsche Bank is accused of wrongdoing in the case.

As part of what is being called Britain’s financial regulator’s largest operation to crack down on insider trading, as many as eleven people from several very prestigious companies may be charged under suspicion of taking part in a long-running insider-dealing scheme. According to the BBC, Deutsche Bank, BNP Paribas, and the hedge fund Moore Capital are now known to have workers entangled in the Financial Services Authority (FSA) probe. And a Bloomberg update (brace yourself), is now claiming as many as eleven people may be charged next week over an insider-trading ring that began at the London printers for financial giants like UBS AG and JPMorgan Chase & Co.’s Cazenove unit (UBS and Cazenove themselves are not accused of any wrongdoing).

The investigation, code named Saturn, is the first joint operation between the FSA and the Serious Organised Crime Agency. The venture began in 2007 and first arrested eight people back in 2008.

Apparently, the homes of sixteen people from Moore Capital were raided by some 140 FSA officials last week, seizing computers and documents, according to Business Insider. Investigators first disclosed that one trader at Moore Capital was being held, along with five others, but his identity was later revealed to be Julian Rifat, according to Bloomberg. People with knowledge of the investigation, speaking on the condition of anonymity to Bloomberg, said that the FSA says that the north-west London operation, involving accountants and spread-betters, used leaked data from deal prospectuses being printed for the banks.

According to the Business Insider, a spokesman for Moore issued the following statement:

This morning representatives of the FSA were at our London office to serve a search warrant for documents relating to an employee of Moore Europe working as an execution trader on its London Equity Execution desk. We understand from the FSA that the investigation concerns possible insider dealing and the investigation of the employee does not involve any of the funds managed by Moore Capital.

Moore is co-operating fully with the FSA in its investigation. The employee has been placed on administrative leave pending completion of the investigation.

Although the FSA has questioned eleven suspects thus far, it has said not all may be charged. According to Bloomberg, the FSA has said it will split any jury trial in two “to make it more manageable”. About half the suspects share the last name of Shah, and some knew each other merely because they shared the same gym, sources close to the investigation said.

City printers and the Indian firms that they use to process information first came under the FSA spotlight three years ago. According to TimesOnline, “That investigation specifically looked at the role of city printers and the revolution in their industry that had seen up to 90 per cent of the typesetting of price-sensitive documentation for Stock Exchange releases outsourced to India.” The FSA is examining whether any of the seven people arrested in the current insider-trading probe used knowledge of forthcoming securities sales to make a profit, specifically block trades (i.e. large sale of securities on behalf of a corporate client).

According to Bloomberg,

Those questioned by the FSA include Deutsche Bank’s Martyn Dodgson, Exane’s Clive Roberts, and Moore Capital’s Julian Rifat. Novum Securities Ltd.’s Graeme Shelley and Iraj Parvizi, a director of Aria Capital Ltd., are also being investigated. Ben Anderson was arrested as part of the probe, according to another person familiar with the case. Anderson’s employment details couldn’t be verified.

The name of the seventh man being investigated has not yet been released.

Last year, the FSA was given the power to negotiate plea-bargains in order to pursue insider-trading investigations similar to those its U.S. counterparts have used to crack down on the crime, such as the case against Galleon Group LLC’s Raj Rajaratnam. According to Businessweek.com, a plea bargain was given to a witness against Malcolm Calvert, a former Cazenove partner who received a 21-month sentence earlier this month. Investigators are hopeful that the suspects may give evidence against one another in return for a plea.

The FSA has been trying to crack down on insider trading after criticism from lawmakers that it wasn’t doing enough to eliminate it, and specifically on hedge funds especially in the wake of the Galleon scandal, according to industry insiders. According to Bloomberg, the FSA had never filed a criminal case of insider trading before 2008. Since then, it has one all three cases to make it to trial, and has made five more separate sets of arrests.

However, in the face of the FSA’s bold action, opposition Conservative lawmakers have threatened to abolish the FSA should they win this year’s election, which must be held by June. They have not yet proposed which agency would take over the FSA’s work such as insider-trading probes.

UPDATE: The seven men arrested (including Rifat) have had their assets frozen and are being allowed a pithy allowance of just $450 per week to cover all of their needs (including legal expenses). The Financial Services Authority has said the men might not be charged for more than a year as the investigation continues and their assets are likely to remain frozen.

Former New Castle Funds LLC trader Danielle Chiesi is looking pretty good these days, all things considered. (I can’t post the picture because I don’t own the rights or have that kind of money, but here’s the link). I mean, she is a co-defendant in what prosecutors are describing as the biggest hedge fund insider-trading case in U.S. history. But she’s looking pretty damn perky. Downright chipper, in fact, if the linked photo is any indication. And enviably thin (though that could just be the stress of facing up to 155 years in jail and tens of millions of dollars in fines, plus the possible forfeiture of the proceeds of the charged crimes.). But still! Perky! And blissfully (perhaps naively) hopeful– she’s been quoted as saying that she won’t see a single day in jail. But maybe now she has a prayer of that happening.

On Monday, lawyers for accused Galleon founder Raj Rajaratnam, 52, and his co-defendent Chiesi filed papers to request separate trials on the grounds that allegations of seven distinct conspiracies to commit securities fraud failed to show they could be connected at trial, according to Wall Street Journal article. “There is an utter lack of meaningful overlap between the seven alleged conspiracies in the case,” Rajaratnam’s lawyer, John Dowd, said in a memorandum to U.S. District Court Judge Richard Holwell. He goes on to say,

Each purported ’scheme’ involves entirely different communications, participants, and acts, and will thus require the presentation of entirely different evidence and witnesses. The need for multiple limiting instructions and other judicial safeguards to ensure appropriate consideration of each defendant and each offense will also increase the time and resources required to conduct a fair joint trial.

In a Bloomberg article, Dowd went even further, suggesting, “The cumulative impact of evidence presented against Ms. Chiesi will improperly spill over to Mr. Rajaratnam, compromising Mr. Rajaratnam’s trial rights.”

Alan Kaufman, a lawyer for Chiesi, 44, made a similar argument for severance of trial. He was quoted in the WSJ as saying, that a joint trial of Chiesi and Rajaratnam,

would visit irremediable, prejudicial spillover upon Chiesi and deny her of her right to a fair trial.The complexity and disparity of the allegations in this case carry with them the danger that during the lengthy time period that would be necessary in connection with endeavoring to prove seven separate conspiracies, and the repeated limiting instructions required, jurors would become confused as to which evidence pertained to which conspiracy count, and, in turn, which defendant.

The criminal trial of Rajaratnam and Chiesi was scheduled to start on October 25. They were arrested on Oct 16, 2009 and pleaded not guilty two months later. Both are currently free on bail.

According to Reuters, as part of Rajaratnam’s lawyers’ defense strategy, they attacked the credibility of former trader and government cooperator Roomy Khan,in an effort to suppress wiretap evidence which was obtained, Rajaratam’s lawyers allege, “based almost entirely” upon the questionable testimony of Khan. Khan, who was previously convicted of insider-trading and who pleaded guilty in the Galleon case, allegedly recanted what she told FBI investigators in interviews regarding purchases of Hilton Hotels Corp stock.

As part of his defense, Rajaratam’s lawyers are arguing that Khan “preposterously claimed” she bought the Hilton stock before the company was bought by a private equity firm, because “Paris Hilton was incarcerated [for violating probation on driving offenses] so Khan thought this could be good publicity for the hotel,” according to Galleon’s lawyers. Because I know that’s how I choose which stock I invest in… I always look to see which celebrity du jour has been locked up and buy up everything I can…. right.

In later interviews, according to Reuters, Khan, a onetime employee of Intel Corp and Galleon, confessed that she obtained the tip on Hilton from a Moody’s Corp analyst Deep Shah, the memo said. Shah is also charged in the case, but has yet to be arrested.

Now Rajaratnam’s lawyers are saying that the government knew that Khan was “an inveterate fabricator” when it filed applications with the court between March and November 2008 to conduct wiretaps on the basis the information she had provided the government with and the evidence should be thrown out.

In a memo, quoted by Reuters, Rajartnam’s lawyers said,

Not only did the government fail to bring these facts to the court’s attention, it claimed in two of the affidavits in support of those applications that Khan has proven to be ‘reliable’.

Rajartnam and Chiesi are also facing trial for civil fraud charges brought by SEC along with about 20 other former traders, lawyers and executives stretching from Wall Street to the Silicon Valley. Prosecutors have alleged Rajaratnam made $45 million (some reports have estimates as high as $49 million) from illegal trading based on confidential tips and that Chiesi made $4 million.

So far, most of the evidence was gathered by prosecutors has been obtained using wiretaps and information from cooperators. Ten out of 21 people charged in connection with the Galleon case have pleaded guilty to fraud charges. Of those, eight have chosen to cooperate with the government.

A prominent Brooklyn rabbi, accused 7 years ago of stealing government grants, was arrested on Thursday for blackmailing a Connecticut hedge fund for $4 million which he allegedly planned to give to two schools he works with (Bais Yaakov and Torah Vodaath). Awww. Gotta love a criminal with a heart of gold. Hope it’s worth the jail time.

Rabbi Milton Balkany, 63, of Brooklyn, was charged with extortion, blackmail, wire fraud, and making false statements as part of an elaborate scheme to shake down the hedge fund he “discovered” had been using insider trading to profit from stock trades. Though prosecutors refuse to release the name of the hedge fund, Reuters has reported a source familiar with the matter confirmed that the hedge fund being blackmailed is SAC Capital Advisors, one of the world’s largest and most successful hedge funds which manages about $12 in assets. Mr. Balkany became privy to this information through his work as a “spiritual adviser” to a federal inmate. Prosecutors say that Balkany approached the hedge fund’s lawyers saying that the U.S Attorney’s Office and the FBI were trying to get the federal inmate to reveal what he knew about the illegal insider trades. There were apparently no such insider trades.

According to the New York Times, prosecutors say that Balkany told the hedge fund’s lawyers that unless they paid him $4 million, he would instruct the inmate to tell the authorities about the insider trades. The lawyers for the hedge fund recorded his conversations with Balkany. On Thursday, as video and audio tapes rolled, Balkany met with the lawyer and accepted two checks, totaling $3.25 million. He was arrested later that afternoon.

Balkany insists that he was merely trying to help a young man in prison. He was quoted in the NY Daily News as saying, “He got a very lengthy term and I was trying to reduce it. I was in touch with the U.S. Attorney’s office the whole time,” he said. Prosecutors are less than convinced. Balkany was in fact in contact with the U.S. Attorney’s office, but his motives appear to have been to induce prosecutors to contact the inmate in order to put pressure on the fund, prosecutors said. During those conversations, he allegedly made false statements.

Kudos to the unnamed hedge fund for walking away the victor in this one. In an era of extra-sensitivity regarding the mere suggestion of impropriety or insider trading, especially in the wake of the Galleon Group scandal, it would have been very easy to have give into the demands of a rogue extortionist in the interest of not being exposed for illegal activities (whether or not the fund had actually engaged in such practices, the mere suggestion could have been very damaging).

Balkany was released on $250,000 bond on Thursday, February 18.