FBI raids 3 hedge funds in insider trading case

NEW YORK (Reuters) - The FBI raided three hedge funds as part of a widening probe into suspected insider trading in the $1.7 trillion hedge fund industry.

Law enforcement officials carry boxes marked "Evidence" out of the building housing Loch Capital Management in Boston, November 22, 2010. REUTERS/Brian Snyder

Monday’s raids come as federal prosecutors prepare to unveil a series of new insider trading cases as soon as this year against hedge fund traders, consultants and Wall Street bankers.

Two of the raided funds are Diamondback Capital Management LLC and Level Global Investors LP, each based in Connecticut and run by former managers of Steven Cohen’s SAC Capital Advisors, one of the best-known U.S. hedge funds.

A Boston-based firm, Loch Capital Management, was also raided, a person familiar with the matter said. Loch has close ties with a witness who pleaded guilty in an insider trading probe centered on hedge fund Galleon Group.

“The Justice Department promised a more muscular approach to white-collar crime, and is delivering,” said Eugene O’Donnell, a professor at the City University of New York’s John Jay College of Criminal Justice.

Spokesmen for the Federal Bureau of Investigation in New York and Boston said on Monday that the agency had executed search warrants in connection with an ongoing investigation.

At about 10 a.m., FBI agents, including one in a sweatshirt, entered Diamondback offices and shouted into the trading room. They ordered about 60 employees to halt work immediately and herded them into a conference room for about one hour, according to one employee at the firm.

Meanwhile, a witness saw agents carry five cardboard boxes from the building housing Loch offices and deposit them in an unmarked silver Dodge minivan. The driver referred questions to the FBI office in Boston, which declined to comment.


Prosecutors have called the Galleon case, centered on fund founder Raj Rajaratnam, the largest U.S. hedge fund insider trading case ever. Twenty-three people have faced criminal or civil charges in that case, which was revealed 13 months ago.

Among the 14 people to plead guilty is Steven Fortuna, a former managing director at Boston hedge fund S2 Capital LLC and a friend of Loch’s co-founders, brothers Timothy and Todd McSweeney.

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Officials such as U.S. Attorney Preet Bharara in Manhattan are examining the use of “expert network” firms that command big fees from hedge funds to match them with industry specialists.

They are also examining whether investment bankers and others tipped off traders to news about buyouts of pharmaceutical companies.

Started in 2005, Diamondback oversees roughly $5 billion of assets and is based in Stamford, Connecticut.

Level Global, based in Greenwich, Connecticut, has about $4 billion of assets and was created by SAC alumnus David Ganek.

Loch once invested more than $2 billion, but this year shed many of its U.S.-listed holdings, regulatory filings show.

Andrew Merrill, a Level Global spokesman, said FBI agents “visited our offices this morning as part of what we believe to be a broader investigation of the financial services industry.” He said the firm is cooperating and “fully operational.”

Diamondback also confirmed an FBI inquiry and said it is cooperating and “fully operational.”

Loch did not immediately return requests for comment.

At the Diamondback offices, the FBI agents were interested in information stored on computer servers, the employee at the firm who described the raid said. The person asked not to be named because of a lack of authority to speak for the firm.

“They could have just as easily come in before hours and gotten what they wanted,” the employee said. “Why did this have to be in a dramatic, Hollywood manner?”

Some lawyers familiar with the broader trading probe said one focus appears to be on SAC traders and managers at hedge funds that traded in similar stocks. SAC declined to comment.

“The end game is deterrence,” O’Donnell said. “The number of prosecutions will always be small, but deterrence can have a multiplier effect that stops untold numbers of other people.”


Goldman Sachs Group Inc shares fell 3.4 percent after the Wall Street Journal said the Justice Department is examining possible leaks by bank employees about mergers.

A Goldman spokesman declined to comment. The newspaper had reported the raids on the hedge funds earlier Monday.

Speaking last month to the New York City Bar Association, Bharara called insider trading a “rampant” problem that prosecutors need more tools to fight.

He said the increased speed and volume of trading makes it harder to pinpoint specific illegal trades and that a “veritable explosion of newsletters, websites, blogs, tweets, and feeds” can make it easier for the accused to argue that they traded based on information obtained legally.

“Many people have been harmed in the financial crisis, but every harm isn’t a crime,” said Samuel Buell, a Duke University law professor. “Insider trading often involves surreptitious behavior, the type of evidence that makes it easy to point to someone and say: ‘He knew he was committing a crime.’”

In Galleon, U.S. District Judge Richard Holwell is expected to rule soon whether thousands of wiretapped conversations involving Rajaratnam and alleged cohorts can be admitted at trial, now slated to begin in January.

Co-defendant Danielle Chiesi, a former trader at the New Castle Funds LLC hedge fund, asked the judge on Monday to suppress statements made to FBI agents when she was arrested. The judge did not immediately rule on that request.

Reporting by Daniel Bases, Emily Chasan, Elinor Comlay, Matthew Goldstein, Grant McCool and Jonathan Stempel in New York; Svea Herbst-Bayliss, Ross Kerber, Scott Malone and Aaron Pressman in Boston; Rachelle Younglai in Washington, D.C.; and Joe Rauch in Charlotte, North Carolina; editing by Dave Zimmerman and Andre Grenon