Diamondback, Level Global Not Insider-Trading Probe's Focus

Nov 30 2010 | 11:43am ET

Two of the three hedge funds whose offices were raided last week as part of a major insider-trading investigation have said that they are not targets in the probe.

Both Diamondback Capital Management and Level Global Investors told investors that they have been assured by the government that they are not being targeted. But Diamondback, which is based in Stamford, Conn., said that the raid was focused on one of its portfolio managers and a former employee.

That portfolio manager, who has not been identified, was put on leave yesterday. The former employee reported to that portfolio manager, Diamondback co-founders Lawrence Sapanski and Richard Schimel wrote.

The $5.8 billion firm added that it has received a federal grand jury subpoena "similar to those received by many other market participants," and that it is "fully cooperating."

Level Global, whose New York offices were raided last week along with Diamondback and Boston-based Loch Capital Management, said it also received a subpoena last week and met with the U.S. Attorney's Office in New York on Nov. 23, one day after the raids.

In its letter to investors, Diamondback wrote that "one of the principal areas on which the government appears to be focused is the use of industry research consultants," or expert networks. To date, the only arrest in the case—that of Don Ching Trang Chu last week—has been of an expert network provider. Chu worked for Primary Global Research.

The three-year long probe is also investigating whether investment banks passed confidential information on to hedge funds and other traders, as well as the use of soft-dollars.

U.S. Attorney General Eric Holder, who oversees the Manhattan U.S. Attorney's office conducting the probe, weighed in on the case for the first time yesterday, calling it "very serious."

The attorney general told a news conference that he would not "get into the details," but added that the "investigation is ongoing."

Dozens of hedge funds, mutual funds and other market players have been subpoenaed in the case, including Citadel Investment Group and SAC Capital Advisors. SAC, in particular, has appeared vulnerable: Both Diamondback and Level Global were founded by SAC alumni and one expert network founder said that the Federal Bureau of Investigation asked him to wear a wire in conversations with the hedge fund giant. What's more, Chu is accused of providing insider information to Richard Choo-Beng Lee, a cooperating witness in the Galleon Group insider-trading case, who pleaded guilty to insider-trading himself, including when he was at SAC.

One of the companies about which Chu is accused of providing information, television chip maker Broadcom Corp., said yesterday that it is cooperating with the investigation. The complaint against Chu said he got his information from a pair of unidentified Broadcom employees, neither of whom are "executive officers," Broadcom said in a statement.


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