May 27, 2011 / 7:38 PM / 7 years ago

FBI has eyed Loch Capital founder since 2009-filing

* Court filing identifies potential inside trading at Loch

* Loch was one of three hedge funds raided last November

* Prosecutors gather mountain of evidence in expert probe

* Amount of evidence may explain why probe unfolds slowly

By Matthew Goldstein

NEW YORK, May 27 (Reuters) - When federal agents raided the offices of Boston-based hedge fund Loch Capital Management last November, they already had evidence that one of the hedge fund’s founders had obtained “inside information,” according to a court filing.

Todd McSweeney may have used the information from a so-called expert network firm to engage in wrongful trading, according to a wiretap application. The document came to light when it was attached to a motion filed in a related case.

Loch Capital, which at one stage managed as much as $2 billion, and two other hedge funds, Diamondback Capital Management and Level Global Investors, were raided in November as part of a government probe of expert networks, which match hedge funds with corporate executives moonlighting as industry consultants.

Prosecutors have found that some consultants have gone beyond providing industry insights and instead have sold corporate secrets.

No one from the three hedge funds has been charged in connection with the expert network probe and Loch Capital said last November that neither Todd McSweeney nor his brother Tim were targets of the raid.

However, the court filing on Monday shows the government amassing a mountain of evidence and leads for investigators to follow, which may explain why the probe is moving so slowly.

It quotes Federal Bureau of Investigation special agent James Hinkle saying that a confidential informant had recorded a conversation with Todd McSweeney on April 15 2009.

McSweeney told the informant he had paid expert network firm Primary Global Research “to arrange for conversations with PGR’s consultants or experts who provided McSweeney with inside information,” according to Hinkle.

A lawyer for Loch Capital, which shut its doors soon after the FBI raid on Nov. 22, did not return a phone call seeking comment. McSweeney could not be reached for comment.

At its peak, Loch Capital was one of Boston’s largest hedge fund and had attracted money from investment funds run by Citigroup, Credit Suisse and American International Group.

The brothers, who grew-up in the Boston suburb of Lexington, graduated from Clark University in nearby Worcester and earned business degrees from Northeastern University.

The filing came in a case against James Fleishman, a former PGR executive, who is accused of conspiring to help the firm’s hedge fund clients get access to consultants who might pass on confidential information.

The California-based Primary Global has emerged as the focal point of the government’s probe of expert networks, the newest phase in its three-year crackdown on insider trading. Since November, U.S prosecutors in New York have charged more than a dozen people who either worked for Primary Global or allegedly received inside tips from Primary Global while working for a hedge fund.

One of those defendants, hedge fund manager Samir Barai, was expected to plead guilty to trading on illegal tips, according to court records.

Prosecutors have amassed more than 1,800 audio recordings, e-mails from 100 people, more than a 1,000 pages of documents provided by cooperating witnesses and more than 3,000 pages of notes by investigators and wiretap applications, according to the documents filed by Fleishman’s lawyers.

Additionally, prosecutors have said that they also had obtained “instant message” communications between employees of Primary Global and traders and analysts with hedge funds SAC Capital Advisors, Balyasny Asset Management and Coatue Management. That revelation came in a letter from prosecutors to Fleishman’s lawyers on April 8, which was also contained in the filing.

Earlier this year, two former employees of Steven Cohen’s SAC Capital pleaded guilty to trading on illegal tips obtained from a former Primary Global consultant. Federal agents have been investigating allegations of wrongful trading at SAC Capital since at least 2007. Authorities have not charged Cohen or any of his top traders with doing anything improper.

Still, the court filing by Fleischman’s attorney gives a sense of the scope of the current investigation and why some six months since the raids, there has been little sign of further action by the authorities.

Indeed, the tape recording of Todd McSweeney was made in April 2009 -- roughly six months before the arrest of Galleon Group founder Raj Rajaratnam and dozens of others. Rajaratnam was convicted May 11 by a federal jury on 14 counts of insider trading following a nearly two-month trial.

As for Loch Capital, it’s name first surfaced in the insider trading investigation in January 2010, when Reuters reported that investors were pulling money from the hedge fund because of the Galleon investigation. Investors were redeeming money from the tech-focused hedge fund because the McSweeneys were close friends with former hedge manager Steven Fortuna, who was arrested in the Galleon case.

Fortuna, the former manager of S2 Capital, pleaded guilty on Nov. 5, 2009, and has been cooperating with federal authorities. In a court proceeding on May 23, Assistant U.S. Attorney Jonathan Streeter said Fortuna was continuing to cooperate and provide information on individuals “that we are still reviewing.”

Reported by Matthew Goldstein; Editing by Eddie Evans, Martin Howell

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