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U.S. Federal agents swooped down on three hedge funds as insider trading probe escalates

Tuesday, November 23, 2010
Opalesque Industry update – Agents of the Federal Bureau of Investigation (FBI) on Monday swooped down on three hedge funds as investigation into an alleged largest insider case is escalating, various media reports said.

The FBI raided two Connecticut hedge funds, Diamondback Capital Management and Level Global Investors, as well as Loch Capital Management, which is based in Boston, reported The Globe and Mail, which also said that Level Global and Diamondback are run by former alumni of legendary hedge fund manager Steve Cohen, founder of SAC Capital Advisors. Their offices in Stamford and Greenwich are each less than fifteen miles away from SAC's Stamford headquarters, said CNBC. The highly secretive Cohen is famous for his lavish art collections and his ability to consistently beat the S&P 500. SAC Capital has not been accused of any wrongdoing.

The FBI earlier tried to get the cooperation of former SAC employee, tech analyst and principal of research firm Broadband Research, 53-year-old John Kinnucan, by asking him to record his calls with a client, namely SAC Capital according to the Wall Street Journal. Mr. Kinnucan declined the offer, and later sent out a blast email to his hedge fund and mutual fund clients detailing the visit.

The Globe and Mail reported a different fact, saying that Kinnucan, who worked at SAC Capital between 1999 and 2004, had agreed to cooperate with prosecutors as part of a plea bargain.

A separate report filed by CNBC showed that all the three hedge funds raided by the FBI had faced investor outflows and had seen several high profile staff departures in the past year.

The U.S. government is seemingly focusing the investigation into an alleged network of traders and managers, as regulators believe the funds had traded on nonpublic information about stocks, CNBC added.

An FBI spokesman told The Telegraph, "We can confirm that we've conducted a couple of searches in connection with an investigation.” In a separate interview by The Telegraph, a spokesman for Level Global said: "we can confirm that agents from the FBI visited our offices this morning as part of what we believe to be a broader investigation of the financial services industry discussed in media reports over the weekend. We are cooperating fully with the authorities and, at the same time, we are fully operational and continue to work diligently for the benefit of our investors."

The long-short strategy fund management firm Level Global Investors, which changed its name to Level Management LP, manages $3.5bn in assets. The fund was launched in 2003 by ex-SAC employees David Ganek and Anthony Chiasson. The firm saw several top-level departures in recent years, as its compliance chief, Taki Vasilakis, joined Morgan Stanley’s Frontpoint Partners, and partner Jeffrey Messina left to join Citadel Investment Group.

In January, Reuters reported that technology-focused investment firm Loch Capital had been hit by investor redemptions after founders were implicated in the Galleon insider case trading. During its peak Loch Capital managed more than $2bn in assets but this has now been reduced to $750m.

The $5bn multi-strategy fund firm Diamondback struggled in 2008 as it lost money when Lehman Brothers collapsed. The fund filed more than $800m in claims from the collapsed banks. It was also fined by the SEC for making short sales prior to the public offering of four companies last year. According to Absolute Returns Magazine, Diamondback’s performance was 19% in 2007, 1.2% in 2008, 25% in 2009, and 2.2% through April this year.

Already, news of the FBI raid is adding pressure to Diamondback as Joelle Mevi, chief investment officer for the $10bn New Mexico Public Employees Retirement Association, which has $42m invested with the fund, has expressed concern over the ongoing investigation. She disclosed that she will wait for Cliffwater LLC, the pension’s consulting firm, to provide them with more details on the investigation before making recommendation to the retirement fund’s board on how to move forward.

Three-year investigation
The FBI has been investigating hedge funds, investment banks and independent research networks on Wall Street for three years. A recent report quoted an unidentified FBI agent as saying that the Feds would “expose a culture of pervasive insider trading in U.S. financial markets, including new ways non-public information is passed to traders through experts tied to specific industries or companies.”

The FBI, federal prosecutors in New York, and the Securities and Exchange Commission (SEC), who are targeting a large network of personnel and companies involved in alleged insider trading, have not filed any charges yet. According to reports, dozens of arrests are expected. The investigations could lead to some charges by year's end, according to federal authorities.

The investigation includes some major industry players like SAC Capital Advisors LP, Citadel Asset Management, and mutual-fund firms Janus Capital Group, Wellington Management Co. and MFS Investment Management, Deutsche Bank, UBS and Prudential Securities, said Forbes.
- Precy Dumlao


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