November 22, 2011 / 9:46 PM / 6 years ago

A year after an FBI raid, Diamondback limps along

* Diamondback only firm still in open after being raided

* No charges filed but no apparent closure either

By Svea Herbst-Bayliss and Katya Wachtel

BOSTON/NEW YORK, Nov 22 (Reuters) - For Diamondback Capital Management this week marks an auspicious anniversary: a high-profile raid by federal authorities looking into allegations of insider trading by hedge funds.

But after a tough year full of heavy investor redemptions and a sudden drop in performance in August, top managers at Diamondback have reason to celebrate. The Stamford, Connecticut-based fund is the only one of four firms raided by federal authorities last year to still be open for business.

Yet with federal prosecutors continuing to investigate incidents of insider trading, pension funds continuing to redeem money and top employees leaving the firm, some in the $2 trillion hedge fund industry wonder how long Diamondback can last. "They have gotten much smaller and if they shrink any further their business model could be impacted," said one person who has first hand knowledge for the firm's operations.

To date, no one associated with Diamondback has been charged with any wrongdoing stemming from the raid carried out by the Federal Bureau of Investigation. But the investigation has taken its toll on the firm's assets under management with it being cut in half over the past year to $2.5 billion.

"Having such a public investigation with no prosecution is an unfair burden for any organization to carry," said Ron Geffner a partner at law firm Sadis & Goldberg who used to work for the Securities and Exchange Commission.

By contrast, things unraveled much more quickly for the other hedge funds raided by the FBI last fall: Level Global Investors, Loch Capital Management and Barai Capital. All are either closed or are in the process of shutting down.

To date, the only top official with any of the four hedge funds to be either charged or convicted of wrongdoing is Samir Barai, founder of Barai Capital.

Some hedge fund investors said one thing that has helped Diamondback weather the storm is that the only person associated with the fund who has been publicly implicated is a lower-level portfolio manager, who was quickly dismissed.

At Diamondback top executives, who got their start at Steven A. Cohen's SAC Capital Advisors, are still not able to speak about what happened or what may be happening in the future. A Diamondback spokesman declined to comment.

To save the business, the team is retooling to focus more on stock investments instead of fixed income trading, something that outside analysts are praising as a savvy step. Mark Fishman, a partner in charge of fixed income, and some of his team will soon leave, said two people familiar with the moves who are not permitted to discuss them publicly.

Another thing working in Diamondback's favor is that some influential institutional investors, including a big fund-of-funds run by Blackstone Group , have remained on board.


But others, including some who were loyal at the start like the pension funds of New Mexico and Philadelphia, are now gone. On Nov. 15, the last deadline for pulling money out this year, Diamondback was hit with roughly $1 billion in redemption notices, three people familiar with the requests said.

Diamondback still has not recovered fully from losses of more than 7 percent in August and a sense that the probe is still active even after former employee Anthony Scolaro pleaded guilty to insider trading, unnerving New Mexico's trustees, chief investment officer Joelle Mevi said. The fund is now off between 2 and 3 percent for the year, two people said.

Several people said they also want clarity about the case of former Diamondback manager Todd Newman, who oversaw technology investments from Boston. Newman was initially put on leave and later let go.

Now, Fishman and his team are about to join dozens of others from Level Global, Loch and Barai who lost their jobs in the wake of the government raids. Some like Level Global founder David Ganek are still spending time winding down some business. Ganek, a prominent art collector, can now devote more of his fortune and time to hobbies and New York's night life where he was recently photographed attending the 2011 Guggenheim International Gala.

Others are less lucky and join a crowded pool of finance professionals at a time the national unemployment rate hovers around 9 percent and Wall Street hiring is slow.

But some former Level Global employees have found new positions. Former chief compliance officer Sean Farrell now works in compliance at David Einhorn's Greenlight Capital and former analyst William McLanahan, who covered financials, moved to Moore Capital.

But Dave Matthews, Loch Capital Management's former chief financial officer, says on his LinkedIn profile that he is unemployed and looking for a position as a CFO/COO/CCO.

"The bar is certainly higher for anyone at a firm that shuts down under a cloud," said Gregory Cresci, an executive recruiter at Odyssey Search Partners in New York. "It ends up being guilt by association."

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