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2 Plead Guilty in Insider-Trading Case; 17 Others Charged

The case involves one of the biggest insider-trading rings ever attempted in New York State.

Updated from 1:07 p.m. EST

A former temporary employee of

Credit Suisse First Boston

and

Goldman Sachs

(GS) - Get Report

pleaded guilty to criminal charges Tuesday after being accused of creating one of the largest insider trading rings ever attempted in New York State.

A Kentucky insurance agent also pleaded guilty to insider trading charges. Seventeen other people were charged in the case, the government's first against someone accused of using the Internet to share insider information.

The

Securities and Exchange Commission

also brought civil fraud charges against each of the defendants, several of whom are accused of earning hundreds of thousands of dollars from the insider information, netting a total of about $8.4 million on 23 deals.

John Freeman, the temporary employee, pleaded guilty to one count of conspiracy and 11 counts of illegal insider trading, said Marvin Smilon, a spokesman for the

U.S. Attorney for the Southern District of New York

. James Cooper, the insurance agent, pleaded guilty to one count of conspiracy and six counts of insider trading.

Smilon said both Freeman and Cooper had agreed to cooperate with the investigation.

Freeman and Cooper, who were arrested earlier this year, could face a maximum of up to five years in jail for the conspiracy charge as well as the greater of a $250,000 fine or two times the gross gain or loss resulting from the offense. They would each face up to 10 years in prison and the greater of $1 million or two times the gross gain or loss resulting from the offense from each count of insider trading.

The remaining 17 defendants were arrested on Tuesday and are scheduled to appear for a preliminary hearing on April 13.

Freeman's lawyer, Yuan Chung Lee, would not comment on the case. A lawyer for Cooper could not immediately be reached for comment.

Earlier on Tuesday, U.S. Attorney Mary Jo White said Freeman, a part-time computer graphics worker assigned to Goldman Sachs and Credit Suisse First Boston by an outside employment agency,

Custom Staffing

, had passed information to friends, co-workers and people he met in online chat rooms.

Freeman, 34, of Brooklyn, was accused of gaining access to confidential information during temporary stints at the two investment firms from May 1997 to January 2000. The government said that Freeman then used the Internet to tip at least 10 people directly and that some of those defendants then informed others about expected mergers and acquisitions.

"This is a case of Wall Street meeting Main Street and coming back again over the Internet," said White at a news conference in Manhattan.

Richard Walker, director of enforcement for the SEC, warned that the Internet leaves a trail of information that can help the government build a case.

"We're seeing a new generation of Wall Streeters who have failed to learn the lessons history has taught," Walker said.

Neither Goldman Sachs nor Credit Suisse First Boston was accused of wrongdoing, but Walker said both firms were "highly incentivized" to improve their security measures because of the nature of their business. The employment agency, Custom Staffing, will not be charged, Smilon said.

Based on information that Freeman provided, the SEC said the other defendants bought stock and/or options in 23 companies that were either in the process of merging or being sold, including

Baker Hughes

TheStreet Recommends

(BHI)

,

DSC Communications

,

Wang Laboratories

,

Illinois Central Railroad

and

Ciena

(CIEN) - Get Report

.

The SEC said Freeman was rewarded with cash gifts and wine for the tips he provided. In some instances, the SEC said, the defendants sent cash to Freeman in birthday cards with no return address.

According to court records, Freeman had just begun his first assignment in the word-processing division of Goldman Sachs in mid-1997 when he made an investment that would lead him to his alleged co-conspirators. After making a bet on

Headstrong Group

, a helmet manufacturer whose stock is now worthless, Freeman went to

America Online

chat rooms to gripe.

He found fellow Headstrong investors Cooper, a Bowling Green, Ky., insurance agent, and Benton Erskine, a Charlestown, W. Va., day trader and computer store owner. Lacking the money to invest, Freeman offered to pass on inside information on mergers and acquisition deals, the government said. Both Cooper and Erskine were charged Tuesday.

Freeman worked at Goldman until June 1998, then landed an assignment at Credit Suisse First Boston from October 1998 until Jan. 6, 2000. According to the government's complaint, Freeman was assigned to produce merger-related documents. While the investment banks often wrote the names of the companies in code, they gave Freeman documents that included market sector, historical stock prices, names of company officers and geographic locations.

Freeman was able to determine the true names of the companies involved with a little Internet research.

Freeman's information eventually spread further from his New York friends and the online Headstrong sympathizers.

According to the government's complaint, Freeman provided inside information to co-workers at

Phillip Morris

(MO) - Get Report

, his full-time employer, and a waiter at a Manhattan restaurant where Freeman was formerly employed, among others. But from the chat rooms, the tips filtered out to day traders, an oil and gas industry worker, a dentist and brokers at

Morgan Keenan

.

All told, 24 people received the tips, according to the government. Not all of them were charged, officials said, because not all could be proven to have received the information, known it was illegal, and profited from it.

At 6 a.m. EST Tuesday, FBI agents arrested 15 people in New York, Kentucky, West Virginia and Tennessee.

Of those arrested, the government said, Freeman made among the least in profit in the loosely connected operation. His $70,000 to $110,000 in kickbacks (not counting the wine, White said) pales next to the gains others made from his insider tips.