October 20, 2009 / 5:24 PM / 8 years ago

UPDATE 4-Hedge fund walls off 2 accused inside traders

* New Castle Partners co-founder on leave, consultant out

* New Castle says will stay in business

* Hedge fund hires law firm Skadden Arps, will cooperate

* Consultant had tax lien as she invested on insider tip

* Union Bancaire Privee to liquidate New Castle-run fund (Adds detail on Swiss bank liquidating a New Castle fund)

By Joseph A. Giannone and Grant McCool

NEW YORK, Oct 20 (Reuters) - New Castle Partners LLC, a hedge fund swept up in the biggest insider-trading scandal in years, said co-founder Mark Kurland has taken a leave of absence and that Danielle Chiesi, a consultant, is no longer associated with the firm.

Kurland and Chiesi were among six people, including Galleon Group founder Raj Rajaratnam, charged on Friday by the U.S. Justice Department and the U.S. Securities and Exchange Commission, accused of reaping more than $20 million by trading on inside information in a dozen companies. [ID:nN16545101]

The news was widely expected to trigger an exodus of customers from the two funds. New Castle, formerly part of Bear Stearns Asset Management that manages about $900 million of assets, urged investors to stay in place.

In a letter to investors Monday, principals Robert Reitzes and Scott Merves said they “intend to be personally invested” with the firm’s funds.

“Our doors are open, our team is intact,” they wrote. “Despite our initial shock, we are determined to successfully navigate through this period.”

Still, many investors typically will not stick around firms implicated in legal and regulatory scandal. Switzerland’s Union Bancaire Privee said it was liquidating a $50 million market neutral U.S. equity fund launched in July that was managed by New Castle and distributed in Europe to retail investors .

In one of two lawsuits filed Friday, prosecutors accused Kurland and Chiesi of collecting and trading on information from at least July 2008 through October 2008, including tips allegedly provided by International Business Machines Corp (IBM.N) senior executive Robert Moffatt.

The federal insider-trading charges carry a possible maximum prison term of 20 years.

New Castle said it is cooperating with federal authorities and has hired law firm Skadden, Arps, Slate, Meagher & Flom.

Kurland, who headed Bear Stearns Asset Management in the early 1990s, launched New Castle with Reitzes in 1995. When JPMorgan Chase & Co (JPM.N) acquired the nearly insolvent Bear Stearns in March 2008, it spun off three hedge funds and two managed accounts to a team led by Kurland, Reitzes and Merves.

Reitzes, reached at his Times Square offices, referred calls to a spokesman.

Castle last year linked up with Mariner Investment Group, a 17-year-old New York firm that invests in hedge funds and is led by Chairman William Michaelcheck, a former senior managing director at Bear.

JPMorgan officials declined to comment.

“New Castle remains fully committed to serving the best interests of its clients,” it said in an emailed statement. “The firm manages liquid equity securities strategies and has a highly experienced and cohesive investment management team that remains fully engaged.”

Chiesi had a debt of more than $63,226 around the time in 2008 that investigators were listening to her phone calls, public records in the New York City Register’s Office show. The Internal Revenue Service filed a tax lien on Aug. 12, 2008, against Chiesi, 43. She paid the debt on Nov. 7, 2008, the records showed.

Her attorney could not immediately be reached for comment.

The criminal complaint said U.S. investigators obtained court approval in August and again in September to tap two telephone land lines and a cell phone used by Chiesi.

She was accused of short-selling shares of Akamai Technologies Inc (AKAM.O) on July 25, 2008, and buying shares of Advanced Micro Devices Inc AMD.N based on inside information on Aug. 15 and Sept. 30 the same year.

The transactions were executed in accounts affiliated with New Castle and earned illegal profits of $2.4 million, according to FBI and SEC investigators.

Other people in Rajaratnam’s network of informants included McKinsey & Co consultant Anil Kumar, a venture capital executive at Intel Corp (INTC.O), Rajiv Goel, and IBM’s Moffatt. (Reporting by Joseph A. Giannone and Grant McCool; Editing by John Wallace, Gerald E. McCormick, Gary Hill)

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