New York’s insular ultra-Orthodox Jewish community collided with the area’s secretive and ultra-wealthy hedge fund industry, leading to the arrest of a politically well-connected rabbi on blackmail and fraud charges.

The rabbi, Milton Balkany, was arrested Thursday, accused of trying to extort $4 million from a Connecticut hedge fund by threatening to expose purported illegal insider trading by the fund.

Half the money was to go to a religious school for girls that Balkany runs in Brooklyn, according to a criminal complaint filed by the U.S. attorney’s office in Manhattan. The other half was to be a “loan” to another school, the complaint says.

Balkany, who was released on bail after his arrest Thursday, intends to plead not guilty, said his lawyer, Ben Brafman.

The case is the latest in a string of legal problems to hit the region’s ultra-Orthodox Jewish community, most notably a sting last summer carried out against a group of New Jersey rabbis, who were charged with peddling political influence.

Balkany is the brother-in-law of the owner of a kosher meat factory in Iowa who went to prison last year after being convicted of financial fraud. Balkany himself avoided prison on 2003 federal charges, brought by the same U.S. attorney’s office, that he had made personal use of a government grant.

The complaint quotes from recorded conversations it says Balkany conducted on the phone and in person last month with lawyers for the hedge fund. The government didn’t identify the hedge fund.

The government filing suggests that Balkany tried to play on a wave of investigations of possible financial wrongdoing in the wake of the mortgage meltdown and credit crisis. In one conversation, according to the complaint, Balkany told the hedge fund’s lawyers that the government was “very thirsty.”

“You have no idea, the pressure and the thirst, on behalf of the government, that’s out there,” Balkany is quoted as saying.

The U.S. attorney’s office that brought the charges against Balkany is currently prosecuting managers of Galleon Group, a hedge fund firm, on insider-trading charges.

Hedge funds are known for their strategic acumen -- and the complaint details how the lawyers for the hedge fund steered Balkany into the arms of law enforcement officials over the course of dozens of phone calls and meetings.

At the same time, Balkany appeared to be in awe of the fund managers -- asking whether, a few months down the road, he might be “able to spend 10 minutes with [a hedge fund manager]. Not asking him for anything . . . just to meet him, and to say hello to him, and that’s it,” according to the complaint.

In the 1990s, Balkany was dubbed the “Brooklyn bundler” for his facility in pulling together political donations from the Jewish community, particularly for Republican candidates such as former New York Mayor Rudolph W. Giuliani

“He had great access and influence,” said Hank Scheinkopf, a New York political consultant.

In 2003, Balkany was welcomed to the U.S. House of Representatives as a guest chaplain. But a few months later, the rabbi faced a criminal charge accusing him of making personal use of a $700,000 government grant for the Bais Yaakov school, which he runs as dean.

The U.S. attorney’s office agreed to defer prosecution in that case after Balkany admitted wrongdoing, paid back most of the money and agreed to certain restrictions on his work.

Since then, Balkany has remained politically involved, giving to local, state and national candidates. But Scheinkopf said Balkany’s “star had faded” since Giuliani’s departure from the New York mayor’s office and Republicans’ loss of control of Congress.

The ultra-Orthodox community has come under scrutiny for its use of government funds to support its religious schools and institutions.

“They’re always looking for some angle,” Samuel Heilman, a City University of New York sociology professor who has studied the ultra-Orthodox. “In the boom times it was easier to find that.”

Rabbi David Zwiebel, head of Agudath Israel of America, an influential ultra-Orthodox organization, said the arrest would cause further problems for a community that has been reeling since the arrests of the New Jersey rabbis last year.

“There was a point in time when one of the greatest assets that we had when dealing with issues out there was a general sense that this was a community of integrity,” said Zwiebel, who deals with elected officials on behalf of his community.

“When that reputation gets tarnished, it certainly makes my job harder.”

nathaniel.popper@

latimes.com