At about 2 a.m. on a November night, a former hedge fund manager named Donald Longueuil allegedly left his apartment in Manhattan with fragments of chopped-up hard drives tucked in his jacket. He walked through the darkened city tossing the pieces in the backs of garbage trucks - four of them, to be safe.

Longueuil had just read that law enforcers were zeroing in on suspected insider-trading rings, and he was trying to destroy evidence, the government said Tuesday. But Longueuil, 34, made the mistake of vividly describing his late-night coverup for an associate who was cooperating with the feds, according to an FBI affidavit.

Using wiretaps and body wires, turning little fish against bigger fish, federal authorities have been waging the most concerted attack on insider trading in a generation, charging dozens of individuals over the past year and a half.

Taken together, the cases raise a basic question: To what extent are some of the financial world's most successful investment firms profiting from fraud?

Last week, as the government unveiled charges against Longueuil and several others, a federal prosecutor described the cheating as "pervasive."

"Given the scope of the allegations to date, we are not talking simply about the occasional corrupt individual; we're talking about something verging on a corrupt business model," Preet Bharara, the U.S. attorney for the Southern District of New York, said in a statement.

The heightened focus on insider trading by the Justice Department and the Securities and Exchange Commission comes as the financial crisis has shaken confidence in the honesty of the financial markets.

Far from being a victimless crime, insider trading takes advantage of honest investors. In a series of cases, financiers are accused of gaining - or avoiding the loss of - more than $100 million trading such familiar stocks as Google, IBM, Hilton and Intel.

"What's at stake is the credibility of our markets," said former Sen. Ted Kaufman (D-Del.), chairman of a panel Congress created to review the Treasury Department's $700 billion bailout of financial companies. Insider trading, he said, "sends a clear message to people who want to invest in the United States that . . . I'm not going to get a fair shake in the market. And that's very dangerous."

It is unclear whether insider trading is on the rise or is merely getting more attention from the authorities. Bharara has said the government is employing extraordinary tactics to expose it - wiretaps previously reserved for such targets as mobsters and drug cartels.

Not since Ivan Boesky and Michael Milken were sent to prison for corruption on Wall Street has the drumbeat of insider trading revelations been this loud.

The current wave of investigations has focused largely on hedge funds - investment vehicles for wealthy individuals and institutional investors that often deliver outsize returns. It also has cast a spotlight on employees of public companies who allegedly feed information to investment firms for a price - sometimes through "expert network firms" that specialize in matching insiders with traders.

Tips and betrayals

The charges have spread like spiderwebs.

Many are clustered around billionaire investor Raj Rajaratnam of Galleon Group, who is scheduled to go on trial in the coming weeks.

The alleged tipsters betrayed some prominent firms by selling their secrets. Leakers who pleaded guilty or were convicted included lawyers at Ropes & Gray, a prestigious corporate law firm; a senior executive at IBM; a partner at Ernst & Young and a director at the big management consulting firm McKinsey & Co.

Although the government did not identify it by name, one of the biggest hedge funds, SAC Capital Advisers, confirmed last week that two of the newest defendants were accused of engaging in insider trading while in SAC's employ.

SAC, led by billionaire art collector Steven A. Cohen, issued a statement saying the alleged actions of the two "required active circumvention of our compliance policies and are egregious violations of our ethical standards."

Theoretically, a hedge fund could reap disproportionately large benefits from even marginal insider-trading profits. That's because hedge funds typically charge fees based not only on their trading profits but also on the amount of money their clients hand them to manage. If a fund shows even modestly higher returns, it might attract more investments and collect bigger fees.

A spokesman for the Managed Funds Association, a trade group for hedge funds, declined to comment on the insider-trading probes. The group recently sent a letter to the SEC seeking clarification on the lines between legitimate research and insider trading.

Since August 2009, 46 people have been criminally charged with insider trading in the Southern District of New York, and 30 of them have pleaded guilty. The SEC has brought many civil cases.

Electronic surveillance has been an especially aggressive tool for penetrating the secretive, $1.7 trillion hedge-fund industry. Longueuil, for instance, was recorded recapping his late-night "20-block walk around the city" in pursuit of garbage trucks, and saying, "I pressed the eject button and everything's [expletive] gone," according to an FBI affidavit. His lawyer declined to comment.

Wired for sound

Wiretaps - and a number of cooperating witnesses - have helped the government build the case against billionaire hedge-fund founder Rajaratnam, once a member of the Wall Street elite. He now faces charges that he pocketed $45 million trading stocks based on illegal tips.

Prosecutors allege that Rajaratnam relied on a wide circle of corporate insiders and traders for exclusive information on tech companies, including their earnings and planned mergers before the news was publicly announced. His attorney declined to comment on the case.

Wiretaps suggest that at least one of Rajaratnam's alleged co-conspirators knew she was breaking the law.

One of his sources, the government says, was Danielle Chiesi, a trader at another hedge fund who prosecutors say was having an "intimate relationship" with Robert Moffat, a high-level IBM executive.

In August 2008, Moffat allegedly told Chiesi about a confidential deal being negotiated by Advanced Micro Devices that he had learned about through his IBM work.

According to prosecutors, Chiesi cautioned another trader with whom she shared the information: "I swear to you in front of God . . . You put me in jail if you talk.

"I'm dead if this leaks. I really am . . . and my career is over. I'll be like Martha [expletive] Stewart," Chiesi allegedly said, alluding to the domestic diva who spent time in prison.

Chiesi's hedge fund bought additional shares of AMD, but she grew worried that if the stock rose too much, her trading would draw scrutiny from regulators. Rajaratnam advised her to sell off half the stock before the announcement, according to court documents.

Rajaratnam also collected nuggets of information from friends and employees at Intel, McKinsey and Moody's, the government says. An analyst at Moody's, Deep Shah, allegedly tipped off a former colleague of Rajaratnam's on a takeover of Hilton. A former McKinsey director, Anil Kumar, who has pled guilty, allegedly gave Rajaratnam other secret information about AMD.

Chiesi, Moffat, Shah and Kumar have all been charged with insider trading. Chiesi and Kumar have both pleaded guilty and are awaiting sentencing. Moffat pleaded guilty and was sentenced to six months in prison. Authorities are still trying to locate Shah.

As investigators pursued the ring around Rajaratnam, they were also getting drawn into the activities of a younger group of Wall Street traders, some of whom used to work at Galleon.

The accused center of this other ring, Zvi Goffer, became known among his associates as "The Octopussy," after the James Bond movie character, because he had so many different sources of information, according to the SEC.

In one instance, Goffer allegedly profited from inside information about the company 3Com. In July 2007, Ropes & Gray, the blue-chip law firm, began handling Bain's offer to buy 3Com. According to the government, two attorneys there told a friend, who then told Goffer. Goffer passed the information to his brother and a handful of other traders, who all bought shares of 3Com, hoping to cash in when the deal was finally announced and the stock price jumped.

Sure enough, 3Com's shares rose when the news became public. Prosecutors allege that Goffer then tried to destroy evidence of his insider trading by biting in half the SIM card of his disposable cell phone. Goffer's lawyer declined to comment.

Inside sources

The scrutiny of insider trading led investigators to examine expert network firms, a relatively new segment of the financial world.

The rise of the expert network firm was to some degree a counter-reaction to an SEC effort to stamp out insider trading more than a decade ago, said John C. Coffee Jr., a professor a Columbia Law School.

Years ago, top corporate executives would share information about upcoming earnings reports with favored Wall Street analysts, who could use the information to the advantage of their investment firms and clients, Coffee said. In 2000, the SEC banned companies from selectively divulging significant information by adopting a rule called Reg FD, for "Fair Disclosure."

That fueled the demand for alternative sources of information.

One such firm, Primary Global Research, billed itself as providing "independent investment research," but it routinely delivered such inside information as revenue numbers and sales forecasts, the SEC said in a recent complaint against PGR employees and consultants, among others. PGR itself has not been charged.

PGR consultants - employees of major corporations - were paid $150 to $1,000 per hour to communicate with clients of the firm. PGR gave them the option of using pseudonyms, the SEC said. In e-mails, PGR personnel talked about tips that would translate into "fast money" for clients, the SEC said.

Daniel L. DeVore, a global supply manager at Dell, made about $145,000 moonlighting for PGR and sharing confidential information about both the computer maker and its suppliers, the SEC alleged.

Another PGR consultant, Winifred Jiau, allegedly provided advance word that for the first quarter of 2008, a technology company called Marvell would report revenue of $804 million and earnings per share of 11 cents, according to the SEC.

Lawyers for DeVore and Jiau did not return calls for comment. A spokesman for PGR declined to comment.

Even as the government tries to prosecute some hedge-fund traders for inside deals, others have offered to help law enforcement crack down on the problem. The SEC alleges that a former assistant for Disney's head of corporate communications and her boyfriend tried to profit from secret company information, including Disney's quarterly earnings before they were released.

The assistant, Bonnie Hoxie, and her boyfriend, Yonni Sebbag (who used the alias "Jonathan Cyrus") sent letters in early 2010 to more than 20 hedge funds, some of whom immediately alerted the SEC, according to the government.

The FBI then went undercover and contacted Sebbag, offering to buy his information. The SEC says that when Hoxie learned Disney's earnings per share, she began dreaming of the designer handbags that Sebbag could buy her as a gift, sending him a photo of a Stella McCartney bag.

Sebagg's response: "I may be able to [buy] u 2 of them, lol."

Sebagg and Hoxie have both pleaded guilty. Sebagg was sentenced to 27 months in prison. Hoxie will be sentenced later this month.