SAN FRANCISCO -- A well-known Internet analyst was released on $500,000 bail in federal court Tuesday and is scheduled to appear in New York on Friday to face charges he provided insider information about a deal between Microsoft and Yahoo (YHOO) to a prominent hedge fund also targeted by federal investigators.

Sandeep Aggarwal, 40, a former analyst for San Francisco-based Caris & Co., was arrested by FBI agents Monday at his home in San Jose. He is accused of leveraging his tech industry contacts and then providing confidential insider information about a 2009 advertising and Internet search agreement between Microsoft and Yahoo to SAC Capital Advisors and a second unidentified hedge fund that same year.

"Like many others before him, Sandeep Aggarwal allegedly broke the law and provided material nonpublic information on a Microsoft-Yahoo deal," FBI Assistant Director-in-Charge George Venizelos said in a statement. "When questioned by his employer about the source of the information, he lied. (Monday's) arrest is the latest step in the FBI's long-running investigation into insider trading in the hedge fund industry."

In 2009 Aggarwal purportedly told a contact at SAC, portfolio manager Richard Lee, that a Microsoft-Yahoo deal was likely.

Lee's hedge fund then purchased several hundred thousand shares of Yahoo stock while Lee bought 25,000 shares of Yahoo for his personal account, according to the U.S. Attorney's Office in the Southern District of New York.

Lee pleaded guilty July 23 to conspiracy and securities fraud in connection with insider trading between April 2009 and 2010, when he worked for SAC Capital Advisors.

The Lee case is part of a broader federal investigation into SAC. In an indictment unsealed Thursday, federal prosecutors accused SAC of earnings hundreds of millions of dollars illegally through insider trading.

Aggarwal is charged with one count each of conspiracy to commit securities fraud, which carries a maximum sentence of five years in prison, and conspiracy to commit wire fraud, which carries a maximum sentence of 20 years in prison.

Aggarwal did not enter a plea at his initial appearance in U.S. District Court in San Francisco on Tuesday. He did not respond to telephone messages left at his home in San Jose. He also has a residence in Gurgon, India.

Aggarwal's attorney, Sam Braverman, told this newspaper that he was reviewing the charges.

"We'll gladly go to New York," Braverman said.

On July 9, 2009, Aggarwal had a telephone call with a friend at Microsoft who worked in the division responsible for its Bing Internet search engine, according to an FBI affidavit. The friend told Aggarwal, who once worked for the Redmond, Wa., company, that a deal between Microsoft and Yahoo was likely within a few weeks.

The next day, July 10, Aggarwal had a telephone call with Lee discussing the Microsoft-Yahoo deal. Lee and his hedge fund then purchased Yahoo shares that day, according to the affidavit.

That same day, the second, unidentified hedge fund contacted Aggarwal's company with its suspicions that Aggarwal was disseminating insider information, according to the affidavit.

Aggarwal told his company's senior management and legal and compliance departments that his sources were not current employees of either Microsoft or Yahoo and he sent a companywide email later in the day saying he had made comments about a Microsoft-Yahoo deal but "My comments about MSFT/YHOO are based on my own assessment ... and I have not heard anything to this regard either from current MSFT/YHOO employees."

In announcing its partnership with Microsoft, Yahoo said the deal would generate about $500 million worth of operating income, save about $200 million in capital expenditures and provide $275 million in annual operating cash flow, according to the affidavit.

Aggarwal had been a prominent Wall Street Internet analyst for 17 years, covering Amazon, eBay (EBAY), Google (GOOG), Yahoo and other tech giants.

On July 17, he sent an email to this newspaper saying that he had moved to India 20 months earlier to create India's first and largest managed marketplace called ShopClues.com.

"We are currently the fastest growing E-Commerce company in India," Aggarwal wrote. "We have a total of 360 employees and perhaps the strongest team executing on the ground in India (ex-Ebay & Oracle (ORCL) from Silicon Valley, Nordstrom etc. in core team)."

Staff writer Pete Carey contributed to this report. Contact Dan Nakaso at 408-271-3648. Follow him at Twitter.com/dannakaso.