Diamondback Calls It Quits Two Years After Raid

Dec 6 2012 | 12:15pm ET

Four hedge funds were raided by the Federal Bureau of Investigation in November 2010. Only one has survived—until now.

Diamondback Capital Management said today that it would liquidate and close its doors in the face of another $520 million in redemption requests. The move comes in the middle of the trial for insider-trading of Todd Newman, a former portfolio manager at the hedge fund.

While the three other hedge funds raided that month quickly folded, Diamondback soldiered on, proclaiming its innocence and cooperation with the federal investigation. It settled with the Securities and Exchange Commission in January, agreeing to surrender the allegedly illegal profits earned by Newman at the firm.

Diamondback told clients it had been assured it was not a target of the federal investigation. But investors still pulled billions from the firm; its assets have fallen from $5.8 billion at the time of the raid to just $1.45 billion following the latest redemptions.

"Rather than continue to manage investor capital while undertaking to restructure the firm to manage this reduced level of assets, we have decided that the most prudent course is to wind down and terminate the funds and return investor capital," firm founders Lawrence Sapanski and Richard Schimel wrote to clients.

Diamondback said it would return most client money by next month. The firm is up 5.85% this year and has posted annualized returns of 9.1% since its 2005 debut.

"We are grateful to have had the privilege of managing your money and developing a seven-year track record of which we can be proud," Sapanski and Schimel told their remaining investors. "We especially appreciate your patience and support during the last two difficult years during which we reached closure of the government's investigation. Our sincerest thanks to each of you for all of your trust in us."

Two former Diamondback employees, analyst Jesse Tortora and portfolio manager Anthony Scolaro, have pleaded guilty to insider trading. It was Scolaro's cooperation that led to the raid two years ago, while Tortora was a key witness against Newman.

Stamford, Conn.-based Diamondback has 133 employees.

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