NEW YORK, AUG. 18 -- A jury convicted a former Wall Street lawyer on 38 counts of insider stock trading here today, handing the government a significant victory in its prosecution of financial corruption cases.

Following a two-week trial, the jury took just three hours to find Israel Grossman, 34, guilty on charges that he tipped off six relatives and friends in advance about a July 1986 recapitalization plan at Colt Industries Inc. Grossman learned about the deal while working at the law firm of Kramer, Levin, Nessen, Kamin & Frankel.

By trading in Colt stock options in advance of a public announcement, Grossman's relatives and friends earned almost $1.5 million when Colt disclosed its plan. The announcement caused the price of Colt shares to soar $27 in a single day of trading.

The relatives and friends were not charged criminally, but they are named in a related Securities and Exchange Commission lawsuit that had been suspended pending the outcome of Grossman's trial. Howard Wilson, the federal prosecutor who tried the case, said today that two of Grossman's relatives had left the country for Israel.

Following Grossman's conviction by the eight-woman, four-man jury, a federal judge revoked Grossman's $1 million bail and he was led away from the courtroom in handcuffs.

Irving Seidman, Grossman's lawyer, said he would appeal the case. "The prosecution was predicated on factual allegations that do not constitute a crime under our law," Seidman said.

While unrelated to earlier guilty pleas by broker Dennis B. Levine and former stock speculator Ivan F. Boesky, the Grossman case was viewed as an important test of the Manhattan U.S. attorney's ability to successfully prosecute financial corruption cases, which often depend on circumstantial evidence.

Federal grand juries here are probing allegations of insider trading and takeover abuses made by government informants, including Boesky and Martin A. Siegel, a former merger specialist who pleaded guilty to insider trading earlier this year. The targets of those investigations, who include executives at several major Wall Street firms, have all asserted their innocence.

"This {Grossman} case demonstrates that these cases can be tried," said Manhattan U.S. Attorney Rudolph W. Giuliani. "The jury understood the case."

As it developed during the trial, the Grossman case had little to do with takeovers or high-stakes institutional stock trading. Instead, the trial told a riveting story of family, betrayal, money laundering and legal intrigue, set in one of New York's most distinctive neighborhoods, the Borough Park section of Brooklyn.

The key prosecution witness at the Grossman trial was David Lev, a 48-year-old Borough Park diamond dealer and distant relative of the accused lawyer.

A stout Hasidic Jew with a striking, flowing beard, Lev took the stand for two days and testified that he helped Grossman family members launder their Colt profits and then concoct a false story for SEC investigators who were suspicious about their immensely profitable trades.

Lev, who served eight months in prison on a 1978 perjury conviction, said on the stand that he turned state's evidence only when the family conspiracy to profit from Grossman's tips about the Colt deal seemed destined to unravel and Lev realized he faced the prospect of another jail term.

"I couldn't do it to my wife again, what I did once before," Lev testified. "I love my family too much to do it again."

Lev said he decided to testify against Grossman only after Lev's attorney, former federal prosecutor Alan Levine, was told by prosecutors that Lev would be granted immunity on all offenses arising from his testimony, except perjury.

On the witness stand, Lev expressed contempt for lead prosecutor Howard Wilson, chief of the Manhattan U.S. attorney's criminal division, because Wilson was the prosecutor who helped obtain Lev's first perjury conviction nine years ago.

"I hate him," Lev said of Wilson during cross examination. Just days before testifying, Lev told his lawyer that he was thinking of fleeing the country rather than help Wilson convict Grossman, sources familiar with the case said.

Lev's most damaging testimony concerned a series of conversations Lev said he had with his brother, Shimon, also a resident of Borough Park and one of the men who allegedly profited from Grossman's tip about the Colt recapitalization.

David Lev testified that when he returned from a trip to Israel on July 23, 1986, two days after Colt's public announcement had sent the price of its shares skyrocketing, he talked about the deal with his brother Shimon while the two were driving in Borough Park.

Lev said his brother told him "that he finally made it and he made it big. He bought either options or stock, I don't know. He bought Colt Industries. ... He got a tip from his cousin Grossman, who worked in a law firm that was doing that job."

At a local synagogue the next morning, Lev testified, he discussed the deal again with Norman Stein, a friend of Shimon Lev who also allegedly profited from Grossman's tip.

Lev testified that Stein told him, "Yes, it's true, Shimon made it," and that Stein described how the Colt options had been bought in Stein's name to disguise Shimon Lev's ownership.

Over the next few months, as the Securities and Exchange Commission pressed an investigation into the suspicious trading in Colt options, Shimon Lev became increasingly nervous about the approximately $265,000 in profits earned from the Colt trades, according to David Lev's testimony.

Eventually, Lev testified, Shimon suggested that the money be transferred to David Lev's bank account and then laundered back to Shimon through the sale of diamonds and through donations to Borough Park charitable organizations.

David Lev said that in November 1986, his brother Shimon asked for $25,000 that was allegedly Israel Grossman's share of Shimon's Colt proceeds.

Lev testified that since he did not have that sum in cash, a check was passed through the Bnos Rochel ("Daughters of Rachel") charitable organization.

"I told {Shimon} it doesn't look good because there is not a stamp on the back {of the check} from an official organization," Lev testified. "{He said} I shouldn't worry, 'Everything is all right.' "

There is no listing for Bnos Rochel in New York telephone directories and the Council of Jewish Organizations of Borough Park has no record of its existence.

In all, Lev paid his brother $157,500 in cash from the proceeds of the Colt transactions. He also used the money for his own purposes, including a $15,000 cash payment to retain his lawyer.

In January of this year, SEC investigators began taking testimony from members of the Grossman ring, which also allegedly included Grossman's cousin, Walter Herzberg; his uncle, George Hirshberg, and his brother-in-law, Saul Listokin.

When the SEC depositions began, Lev testified, he met again with his brother and Norman Stein to discuss how they would explain their Colt trading to the government. Lev said he was pressured to tell a false story to the SEC and he agreed to do so "because I wanted to protect my brother."

But when Grossman was arrested by federal agents in February, Lev learned that investigators had subpoenaed phone records from Grossman's firm that indicated the lawyer had telephoned his relatives numerous times during the time they were trading in Colt stock options.

Lev said he then told Stein and others that he regretted lying to the SEC. He said he would not have risked perjury if he had known the government's circumstantial evidence was so strong.

In his opening and closing arguments, Seidman, Grossman's lawyer, tried to persuade the jury that Lev's testimony was not credible because of his earlier perjury conviction and that the government's telephone records were inadequate proof to convict his client.

Grossman faces up to 190 years in prison.