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Friends of Michael S. Steinberg had always marveled at his good fortune.

In his mid-20s, he landed a job a SAC Capital Advisors, then a small hedge fund owned by Steven A. Cohen, who was fast developing a reputation on Wall Street as a stock trading wizard. As SAC posted stupendous returns year-after-year and became one of the world’s largest hedge funds, Mr. Steinberg earned tens of millions of dollars trading as a trusted lieutenant of Mr. Cohen, and rose within the firm.

When Mr. Steinberg married at the Plaza Hotel a few years after joining SAC, his boss attended the black-tie affair. Mr. Steinberg and his family moved into an $8 million Park Avenue co-op and summered in the Hamptons. He also gave back, helping found Natan, a philanthropy that promotes Israel and Jewish culture.

Then, his charmed life came undone.

On Friday, Mr. Steinberg became the most senior SAC employee to be ensnared in the government’s multiyear insider trading investigation. F.B.I. agents showed up at his apartment on the Upper East Side of Manhattan and arrested him in the pre-dawn hours. Just the day before, Mr. Steinberg had returned from a vacation in Florida, where he and his family visited relatives and took a trip to Disney World.

Later on Friday, Mr. Steinberg, 40, in a black V-neck sweater and charcoal-gray slacks, appeared in Federal District Court in Manhattan and pleaded not guilty. Judge Richard J. Sullivan freed him on $3 million bail.

“Michael Steinberg did absolutely nothing wrong,” Barry H. Berke, a lawyer for Mr. Steinberg, said in a statement. “Caught in the cross-fire of aggressive investigations of others, there is no basis for even the slightest blemish on his spotless reputation.”

The arrest was the latest in a whirlwind of activity related to the government’s investigation of SAC. For years, federal agents have been building a case against the fund. This month, SAC agreed to pay $616 million to settle two civil insider trading actions brought by the Securities and Exchange Commission. On Thursday, a federal judge refused to approve the larger settlement of $602 million, raising concerns over a provision that lets SAC avoid an admission of wrongdoing.

Hedge Fund Inquiry

Including Mr. Steinberg, nine current or former SAC employees have been linked to insider trading while at the company; four have pleaded guilty. Some of the former employees who have been implicated hardly knew Mr. Cohen, who operates a sprawling $15 billion fund with more than 1,000 employees across the globe.

But Mr. Cohen and Mr. Steinberg were close. Mr. Steinberg is one of SAC’s most veteran employees, though he was recently placed on leave soon after being tied to an earlier case. He joined SAC shortly after graduating from the University of Wisconsin. When he began at SAC, it was just Mr. Cohen and several dozen traders. For years, he sat near Mr. Cohen on the trading floor in the fund’s headquarters in Stamford, Conn., and he was part of a team of tech-stock traders that posted outsize returns during the dot-com boom and bust. Later, he helped start Sigma Capital, an SAC unit in Midtown Manhattan.

While years apart, the two share the same hometown — Great Neck, N.Y., on Long Island, where both attended Great Neck North High School. They also share a love of art; Mr. Steinberg introduced Mr. Cohen to his childhood friend Sandy Heller, who became Mr. Cohen’s longtime art adviser.

In the past, SAC has distanced itself from former employees charged with insider trading, but on Friday, it issued a statement in support of Mr. Steinberg: “Mike has conducted himself professionally and ethically during his long tenure at the firm. We believe him to be a man of integrity.”

Federal investigators have tried to press lower-level SAC employees for information in helping them build a case against Mr. Cohen. In one instance, F.B.I. agents showed a former trader a sheet of paper with headshots of his former colleagues, with Mr. Cohen at the center. The agents compared the SAC founder to an organized-crime boss who sat atop a corrupt organization.

The pressure on Mr. Cohen, 56, escalated in November, when prosecutors charged Mathew Martoma, a former SAC portfolio manager, with trading in the drug stocks Elan and Wyeth based on confidential drug trial data that a doctor had leaked to him. Mr. Cohen was involved in drug stock trades, but the government has not claimed that he possessed any secret information. Those trades were the subject of the S.E.C. civil action that SAC settled for $602 million. Mr. Martoma has pleaded not guilty and has refused to cooperate with investigators.

Mr. Cohen has not been accused of any wrongdoing and has told his investors that he believes he has acted appropriately at all times.

Amid his legal woes, Mr. Cohen, whose net worth is estimated at about $10 billion, has gone on a shopping binge in recent days, paying $155 million for the Picasso painting “Le Rêve” and $60 million for an oceanfront estate in East Hampton on Long Island.

Mr. Steinberg’s name surfaced last fall, when a former SAC analyst pleaded guilty to being part of an insider-trading ring that illegally traded the technology stocks Dell and Nvidia. As part of his guilty plea, the analyst, Jon Horvath, implicated Mr. Steinberg, saying that he gave the confidential information to Mr. Steinberg and that they traded based on that data. On Friday, federal prosecutors charged Mr. Steinberg with conspiracy and securities fraud, accusing him of participating in the illegal Dell and Nvidia trades. The Securities and Exchange Commission filed a parallel civil lawsuit against Mr. Steinberg.

Last year, a jury convicted two hedge fund managers at other firms related to the Dell and Nvidia trades. E-mails from Mr. Steinberg that emerged in that trial were included in the indictment on Friday.

In one e-mail from August 2008, sent a few days before Dell’s quarterly earnings announcement, Mr. Horvath disclosed secret details about Dell’s financial data to Mr. Steinberg.

Mr. Horvath wrote that he had “a 2nd hand read from someone at the company.” He added, “Please keep to yourself as obviously not well known.”

Mr. Steinberg replied: “Yes normally we would never divulge data like this, so please be discreet.”

In another e-mail from the trial, Mr. Steinberg told Mr. Horvath and another portfolio manager, Gabe Plotkin, about a conversation he had with Mr. Cohen about conflicting views of Dell inside SAC. Mr. Plotkin owned a large Dell position, while Mr. Steinberg was short, meaning that he thought shares of Dell would drop in value.

“Guys, I was talking to Steve about Dell earlier today and he asked me to get the two of you to compare notes before the print” — meaning ahead of the company’s earnings release — “as we are on opposite sides of this one,” Mr. Steinberg wrote.

Since his name surfaced in the investigation, Mr. Steinberg has occasionally spent evenings in New York hotels to avoid being handcuffed at home in front of his two children. Federal agents refused to let Mr. Steinberg surrender of his own volition at F.B.I. headquarters downtown, expressing the view that white-collar defendants should not be given special treatment.

John Marshall Mantel for The New York Times