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The arrest of Don Ching Trang Chu of Primary Global Research stems from wiretaps and the cooperation of Richard Choo-Beng Lee, a hedge fund manager who pleaded guilty last year as part of the insider-trading prosecution of Galleon Group hedge fund founder Raj Rajaratnam and 22 other traders, lawyers and executives.

Chu, 56, also known as Don Chu, was accused in a criminal complaint in U.S. District Court in New York of introducing hedge funds to corporate executives who gave them insider trading information.

The government scored a victory in the Galleon case on Wednesday when a judge ruled that telephone conversations of Rajaratnam's that were secretly recorded by the FBI were admissible as evidence at his trial. Rajaratnam has pleaded not guilty to charges of conspiracy and securities fraud and is scheduled to go on trial on January 17.

Prosecutors have described the Galleon case as the biggest investigation of insider trading at hedge funds in the United States. The investigation has widened to include subpoenas of several funds with billions of dollars under management.

In subpoenas served on SAC Capital Advisors and other hedge funds and mutual funds, authorities have asked for information about so-called "soft dollar" deals, an arrangement in which a hedge fund client executes trades through a designated brokerage that has some relationship with an expert networking firm such as Primary Global.

Expert networking firms take fees to match up hedge funds with experts in particular industries such as medicine, engineering and technology.

The investigation widened on Monday when FBI agents used search warrants to raid three hedge funds in Connecticut and Massachusetts.

Lee once worked for SAC Capital. There is nothing in Wednesday's complaint accusing SAC Capital of any wrongdoing. A spokesman for SAC declined to comment.

Authorities are looking at funds established by former associates of SAC founder Steven Cohen, according to lawyers and people familiar with the investigation.

A spokesman for Primary Global Research said in a statement that "based upon recent events, PGR has severed its relationship with Mr. Chu."

The statement said Chu served as the firm's liaison in Taiwan and that he had been with PGR for seven years.

Chu, of Somerset, New Jersey, made a brief appearance before a magistrate judge in New York and was released on a bond of $1 million. Chu was not asked to enter a plea to the charges and both of his lawyers declined to comment.

The office of Manhattan federal prosecutor Preet Bharara said Chu had been scheduled to leave the United States for Taiwan on November 28. His lawyers said Chu had planned the trip to visit family. The court was told that Chu had surrendered his U.S. passport and agreed to surrender an expired passport issued by Taiwan.

Prosecutors said Chu had arranged for hedge funds to receive confidential information on companies including Atheros Communications Inc, Broadcom Corp and Sierra Wireless Inc.

The improving economic picture was also brightened by news that consumer sentiment perked up this month to its highest level since June.

But a surprise drop in new home sales last month was a reminder that growth would remain sluggish, and a gauge of core inflation hit an all-time low, supporting the Federal Reserve's November 3 decision to loosen monetary policy.

"The economic recovery in the U.S. is becoming more sustainable, as the improvement in the labor market is finally supporting consumer spending," said Harm Bandholz, chief U.S. economist at UniCredit Research in New York.

Initial claims for state unemployment benefits fell 34,000 to a seasonally adjusted 407,000, the Labor Department said on Wednesday, the lowest since mid-July 2008. That was well below economists' expectations for a fall to 435,000.

SPENDING UP, INFLATION SLOWS

Separately, the Commerce Department said consumer spending rose 0.4 percent in October, increasing for a fourth straight month, after a 0.3 percent gain in September. Economists had expected spending, which accounts for about 70 percent of U.S. economic activity, to increase 0.5 percent last month.

"My expectation has been that we'll drop below 400,000 (jobless claims) before the end of the year, and this puts us on a good pace to do so," said Michael O'Rourke, chief market strategist at BTIG in New York. "That would mean that we could add 150,000 jobs per month, which is where we need to be in order to bring the unemployment rate down."

U.S. stock indexes rose modestly, while government debt prices were little changed. The dollar slipped slightly against the euro and yen.

The spending report showed the Fed's preferred measure of core consumer inflation -- the personal consumption expenditures price index -- rose 0.9 percent. That was the smallest since records started in 1960 and well below the U.S. central bank's 1.7 percent to 2 percent comfort zone.

A third report showed the Thomson Reuters/University of Michigan's final November consumer sentiment index climbed to 71.6 from 67.7 in October. For details see

Though spending rose last month, it was still not robust. Concerns about low inflation and slow economic growth prompted the Fed this month to pump more money into the economy through additional purchases of $600 billion worth of government debt.

The asset purchasing program, also known as quantitative easing in financial markets, is intended to drive already ultra low interest rates further down and boost domestic demand.

The slow nature of the recovery from the worst recession since the 1930s was underscored by new home sales, which dropped 8.1 percent to a 283,000 unit annual rate in October. Analysts polled by Reuters had forecast new home sales rising to a 310,000 unit pace in October. Compared to October last year, sales were down 28.5 percent.

With unemployment stuck at an uncomfortably high 9.6 percent, homeowners are struggling to hang on to their houses, keeping the foreclosure wave high and stifling the sector's recovery. Data on Tuesday showed a drop in the sales of previously owned homes last month.

October's weak sales pace pushed up the supply of new homes on the market to 8.6 months' worth from 7.9 months' worth in September. However, there were 202,000 new homes available for sale in October, the lowest since June 1968.

The criminal complaint unsealed in U.S. District Court in New York said Don Ching Trang Chu, also known as Don Chu, promoted the services of his California-based firm, Primary Global Research, by arranging for corporate executives to leak inside information to hedge funds.

Chu's arrest stems from the cooperation of Richard Choo-Beng Lee, a fund manager who pleaded guilty last year as part of the prosecution of Galleon Group hedge fund founder Raj Rajaratnam and 22 other traders, lawyers and executives.

Prosecutors described that case as the biggest probe of insider trading at hedge funds in the United States, but the investigation has widened to include subpoenas of several funds with billions of dollars under management.

FBI agents used court-approved search warrants to raid three hedge funds in Connecticut and Massachusetts on Monday.

In charging Chu, prosecutors said he arranged for hedge funds to get tips on companies including Atheros Communications Inc, Broadcom Corp and Sierra Wireless Inc in 2008 and 2009.

Chu's lawyer, Jeffrey Plotkin, could not immediately be reached to comment. The office of Manhattan U.S. Attorney Preet Bharara said Chu was scheduled to depart to Taiwan on November 28.

He is expected to appear in Manhattan federal court later on Wednesday.

"SOFT DOLLARS"

In the criminal complaint, which was signed by FBI special agent B. J. Kang, one of the lead investigators on Galleon, authorities said consultants with expert network firms "can earn hundreds of dollars per hour" for their services.

The complaint said that one way expert network firms get paid is through "soft dollars," an arrangement in which a hedge fund client executes trades through a designated brokerage that has some relationship with an expert network firm.

In subpoenas served on SAC Capital and other hedge funds and mutual funds, authorities asked for information about any soft dollar deals those funds had.

Prosecutors allege that from 2008 to 2009. Lee struck up a relationship with Chu, while Lee was working at Spherix Capital. Spherix Capital, is a now-closed San Francisco fund that Lee managed with Ali Far.

Both Lee and Far pleaded guilty to trading on inside information in the Galleon case and are cooperating witnesses.

Far worked at Galleon for many years. Lee is a former trader and analyst at SAC Capital Advisors. As part of his cooperation agreement, Lee agreed to tell prosecutors of any insider trading he engaged in at Steven Cohen's firm, which he left more than six years ago.

The Commerce Department said sales dropped 8.1 percent to a 283,000 unit annual rate after an upwardly revised 308,000 unit pace in September.

Analysts polled by Reuters had forecast new home sales rising to a 310,000 unit pace in October. Compared to October last year, sales were down 28.5 percent.

Housing remains one of the weak spots in the economy, which is showing some strength. With unemployment stuck at an uncomfortably high 9.6 percent, homeowners are struggling to hang on to their houses, keeping the foreclosure wave high and stifling the sector's recovery. Data on Tuesday showed a drop in the sales of previously owned homes last month.

October's weak sales pace pushed up the supply of new homes on the market to 8.6 months' worth from 7.9 months' worth in September. However, there were 202,000 new homes available for sale in October, the lowest since June 1968.

The median sale price for a new home dropped a record 13.9 percent last month from September to $194,900, the lowest since October 2003. Compared to October last year, the median price fell 9.4 percent, the largest drop since July 2009.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)

The Commerce Department said on Wednesday spending rose 0.4 percent after climbing by an upwardly revised 0.3 percent in September.

Economists had expected spending, which accounts for about 70 percent of U.S. economic activity, to increase 0.5 percent last month after a previously reported 0.2 percent gain in September.

The Federal Reserve's preferred measure of consumer inflation -- the personal consumption expenditures price index, excluding food and energy - was flat for a second straight month.

But in the 12 months through October, the core PCE index rose 0.9 percent, the smallest since records started in 1960 and well below the U.S. central bank's 1.7 percent to 2 percent comfort zone.

Though spending rose last month, it was still not robust. Concerns about low inflation and slow economic growth prompted the Fed this month to pump more money into the economy through additional purchases of $600 billion worth of government debt.

The asset purchasing program, also known as quantitative easing in financial markets, is intended to drive already ultra low interest rates further down and boost domestic demand.

Spending was lifted by a 0.5 percent rise in incomes after being flat in September. The rise incomes, which was flagged by October's employment report, was a touch above market expectations for a 0.4 percent gain.

Spending adjusted for inflation increased 0.3 percent after rising 0.2 percent in September. The sixth straight month of gains suggested consumers would continue to support the economy in the fourth quarter as the boost from inventory growth earlier in the year wanes.

Spending grew at a 2.8 percent annual pace in the third quarter, the fastest rate since the fourth quarter of 2006.

With real disposable income rebounding 0.3 percent, the saving rate edged up to 5.7 percent from 5.6 percent in September. Savings rose to an annual rate of $651.1 billion.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)

"Even though SAP may appeal the judgment, the huge amount should be negative for the stock price and, will weaken SAP's position in the U.S.," said Jacques Abramowicz, analyst at Silvia Quandt research.

"Oracle will use the decision as a marketing tool, wielding the moral cudgel every time new contracts are negotiated," he added.

SAP shares fell 1 percent to 35.83 euros by 1105 GMT (6:05 a.m. ET), one of the biggest losers in Germany's blue-chip index DAX, which was up 0.3 percent.

Commerzbank analyst Thomas Becker added: "The $1.3 billion is higher than we expected and marks an all-time high with respect to software patent infringement cases.

Based in the small town of Walldorf, near Heidelberg, SAP said it is considering appealing the decision, which was announced by a U.S. district court jury in Oakland, California on Tuesday.

"This judgment is a shock to SAP who had argued that the intellectual property theft (to) which it had admitted was worth only around $40 million," Abramowicz said and added that it is also 10 times more than SAP has set aside.

SAP has acknowledged that its TomorrowNow subsidiary in the U.S. had wrongfully downloaded millions of Oracle's files.

With the admission of liability, the issue before the jury was how much was owed in damages. SAP said no more than $40 million, while Oracle sought at least $1.65 billion.

"The decision is disappointing and we will now examine all options," a SAP spokesman said, adding that there will be no impact on the company's outlook.

"There may be some reputational damage to sales, and government agencies in the U.S. may be particularly sensitive to the trial's outcome," UBS analyst Michael Briest said.

NO APOTHEKER

Testimony in the trial wrapped up last week without a hoped-for appearance by former SAP chief and current Hewlett-Packard CEO Leo Apotheker.

During the trial, Oracle linked Apotheker to the operations of TomorrowNow. But it did not appear to produce evidence to prove he knew of the theft.

Oracle CEO Larry Ellison has publicly charged Apotheker with overseeing an "industrial espionage scheme" to steal Oracle software. But both SAP and HP characterized the Apotheker issue as a sideshow and said Oracle offered no proof to back up its allegations.

The three-week courtroom drama, which captivated Silicon Valley, featured testimony from such top executives as Oracle's Ellison -- whom SAP's lawyers accused of plucking damages numbers "out of the air" -- and President Safra Catz.