In 1980, the blue-chip Wall Street law firm of Mudge, Rose, Guthrie, Alexander & Ferdon recruited two new partners, Jed Rakoff and Howard Goldstein, who at the time were prosecutors in the southern district of New York specializing in white-collar-crime cases.

Rakoff was chief of the fraud unit with considerable experience in securities and insider-trading cases, and Goldstein was chief of appeals with a similar background. A few years later, the firm also lured Audrey Strauss away from the southern district where she had succeeded Rakoff as chief of the fraud unit.

Historically, Mudge -- like many other elite Wall Street firms -- had been leary of doing criminal work, which Strauss said "used to be considered declasse for big firms . . . "

But Rakoff, Goldstein and, later, Strauss, were told that, if they could bring in white-collar-crime cases, they could devote all of their time to this practice.

The hiring of the three former prosecutors is just one sign of the times at the law firms that represent major corporate clients. "white-collar crime has touched so many pillars of the community that it's now fashionable," said Charles Stillman, partner in a smaller, specialized firm that handles this expanding niche of criminal work.

Rakoff says the white-collar-crime practice has been one of three or four fastest-growing areas at the firm and that it's both "interesting and lucrative," with major cases sometimes costing clients as much as seven figures. All three attorneys concur that their previous experience as prosecutors has proved invaluable to them in their new roles as defense attorneys. Rakoff, who now spends roughly 90 percent of his time on white-collar cases, and his two colleagues are now involved in eight investigations. The firm also has helped corporations investigate when fraud by high-level employes is suspected, and, in one recent case involving officers of a subsidiary of a Fortune 500 company, they took the case to the Justice Department and the officers were convicted.

Mudge, Rose, Guthrie, Alexander & Ferdon is hardly the only big East Coast firm to have recognized white-collar criminal defense work as a new growth industry. Another Wall Street law firm, Cadwalader, Wickersham & Taft, which specializes in commodities law and securities work, has boosted its efforts in this area. So has the Washington law firm McKenna, Conner & Cuneo, which has a number of government contractors as clients, including many leading defense companies. Fried, Frank, Harris, Shriver & Jacobson has also increased its criminal defense work out of its large Washington office.

"Major firms that might have shunned criminal work now embrace white-collar cases," says Martin Auerbach an assistant U.S. attorney in the southern district of New York, who worked on the investigation of fugitive financier Mark Rich. "White-oollar defendants come from the same economic circles and can pay the fees, which tend to be substantial. The pejorative connotations that go with much criminal work don't apply to tax evasion cases. It's a happy coincidence of economics and morality."

Until the late 1970s, a large percentage of white-collar criminal defense cases were handled by specialists in the field who worked for a number of small legal "boutiques" such as Stillman, Friedman & Shaw and Kostelanetz & Ritholz. The majority of New York's elite law firms would usually farm out their criminal cases to smaller specialists, attorneys say.

Now the situation is changing rapidly.

"You develop a white-collar practice, where there's a steady flow of white-collar cases of various kinds," explains Rudolph W. Giuliani, the U.S. attorney for the southern district of New York. Giuliani notes that the southern district has long been a leader in white-collar cases going back to the 1960s, when Robert Morgenthau became known for his vigorous prosecution of white-collar crime. Today, Giuliani says tax-evasion cases produce continuing business and there also has been "a very dramatic increase in insider trading cases," in the last few years, since the Securities and Exchange Commission stepped up prosecution of illegal securities trading by corporate executives and other insiders.

Currency transactions violations are likely to be the next big area of white-collar prosecutions, given the fact that there are now a "substantial number of investigations under way," Giuliani said.

Similarly, the crackdown on government contractor fraud, especially in the Pentagon, has created a brisk market for white-collar legal services. In 1980, 78 defense contractors were suspended and disbarred, but in 1985 the number mushroomed to 582. The Pentagon is now investigating 36 of the top 100 defense contractors for possible contractor fraud.

In the banking area, congressional reports have indicated that roughly one half of recent bank failures, now running at a post-Depression era high of two per week, are because of insider abuse. And the FDIC reports that its criminal referrals and those of state chartered banks have shot up from 250 in 1980 to 600 in 1984. More than 60 banks have voluntarily disclosed currency transaction reporting violations. Some 40 cases have resulted in the conviction of banks or employes, according to the U.S. Treasury Department.

Much of the white-collar defense work at Fried, Frank, Harris, Shriver & Jacobson, a New York firm with a large Washington office is an outgrowth of the firm's work in government contracting and SEC regulation, said Richard Sauber, former head of a special unit on defense procurement fraud at the Justice Department. Sauber joined the firm 18 months ago to work with two other partners and 10 associates in handling white-collar criminal defenses and he spends much of his time working for defense contractors under investigation.

The goal for most of his clients, he says, is to avoid suspension and disbarment and that he is hired by companies "that have heard they are in trouble."

Both defense lawyers and prosecutors concur that white-collar criminal practice has some distinctive traits setting it apart from other kinds of criminal work. Defense lawyers are involved in these cases much earlier than in street crime and often come into cases when the first subpoenas for documents go out, tipping off a client that he is under investigation. And because the key to success in white-collar criminal work is avoiding indictments and trials -- at almost any cost -- most attorneys in the field say that a large percentage of their work takes place in the pre-indictment stages. "People realize that pre-indictment work is a big part of the game. That costs money, and I think costs have spiraled here," observes Paul Schechtman, a law professor at the University of Pennsylvania who recently left the southern district in New York. "If your client is an attractive white-collar criminal, you often bring them in to show them off . . . There's a lot of bluffing, prying and trying to play on old ties."

"The human and psychological side is as important as the factual side in convincing prosecutors not to proceed," said Edward M. Shaw. "We have to decide early on whether to share things with the prosecutors to convince them to drop the case." Shaw maintains that this approach is useful because the "mindset is not nearly as open in later months," after prosecutors have invested enormous time, energy and money in a case. "If you put some cards on the table and talk, you might make a deal. You need to be persistent and keep plugging away."

One of the newest entries to the white-collar defense bar is the Washington and Los Angeles firm of McKenna, Conner & Cuneo, which ranks near the top in government contract work and represents a number of major defense contractors. A year and a half ago, the firm recruited Breck Willcox, a former prosecutor in the Justice Department with eight years experience in government fraud and procurement cases.

"The firm views the white-collar criminal defense area as the fastest growing area of business today," says Willcox. "The firms here viewed criminal work as dirty, but all of a sudden they realized that the focus on government contracting was going to increase."

The future looks rosy for more white-collar legal work in the defense contracting area, says Willcox. Pentagon sources say there are over 100 cases under investigation on the scale of the General Electric Co. case -- GE earlier this year pleaded guilty to a 108-count indictment and admitted overcharging the government $800,000.