BUT THE REAL action started on Monday. It was the Twin Peaks of Wall Street afternoons: wildly hard to follow but thrilling nonetheless.
The F.B.I. raided the $4 billion Level Global and $5 billion-plus Diamondback Capital, both Connecticut-based hedge funds run by former SAC traders. Level Global’s Anthony Chiasson was recently a client of the wine-sipping Mr. Kinnucan, and also said to be an associate of Galleon’s Todd Deutsch. His firm recently sold a stake to Goldman.
At Diamondback, meanwhile, cofounder Rich Schimel is Mr. Cohen’s brother-in-law, and his COO John Hagarty had been COO at FrontPoint, Chip Skowron III’s firm. Plus, the New York State pension fund, whose kickbacks scandal has ensnared the glorious financier Steve Rattner, said it had $225 million with Diamondback. Last year, the firm returned nearly $100,000 in profits and paid about $70,000 more to settle S.E.C. complaints about stock offerings.
But a third hedge fund, Boston’s Loch Capital Management, was raided, too. It’s run by twins, Todd and Timothy McSweeney, well known for their friendship with Steven Fortuna, one of the hedge fund managers who pleaded guilty in the Galleon case.
Naturally, Mr. Fortuna had been linked earlier in the month to a former SAC analyst, Mark Adams. Mr. Adams’ more recent firm, Balyasny, has announced that it was subpoenaed, along with SAC Capital. Citadel was reportedly subpoenaed, too. So were the $161 billion mutual fund Janus Capital and $598 billion Wellington Management, other Kinnucan clients. On Nov. 24, the expert network Primary Global Research’s Don Ching Trang Chu was arrested, a few days before leaving for Taiwan. “Don is just a fun person to travel with,” an online biography says. Mr. Lee, the former SAC trader, had reportedly worked with him.
BUT WALL STREET is unimpressed. “They’re pointing at everybody, it seems to me,” former Goldman Sachs International president Roy Smith, now an N.Y.U. professor, said. “The present attitude about bankers on the part of the government is so negative that they assume every banker and every broker is inclined to do these kinds of things.”
“I do think the press is playing very, very nicely into the hands of the government on this one. I think they’re sensationalizing this thing in a huge way,” a source close to Mr. Cohen said. “‘Ooh, they’re former SAC,’” he said with a singsong. “Just because they were former SAC guys doesn’t mean it reflects on the SAC of today, the SAC of three years ago, the SAC of four years ago, the SAC of five years ago.”
Is Mr. Cohen nervous? “Just because you got a subpoena doesn’t mean you did anything. It’s a request for information,” the source said. “Let’s just be clear.”
“There are several different investigations that started out with a great deal of momentum, and if you look at where they ended up, there’s a gap,” a senior trader at a major bank said on Monday. Like the New York hedge fund manager, he complained that subpoenas crush reputations. “Are they causing more damage to the system than they’re trying to fix? Fellas, what are you guys doing! We’re in the midst of a crisis here; clearly, we want to weed out bad actors, but what is all this?”
In letters to investors, firms like Diamondback said federal investigators are interested in only “a single employee” (plus maybe “a former employee who reported to that employee”). “It feels like, O.K.,” said the trader, “this is it, a couple of guys.”
“I hope for the sake of regulators and law enforcement agencies that they actually have got something, because they’ve created a huge amount of smoke,” said one senior executive at another major bank. Like the trader, the hedge fund manager, the mortgage strategist and the source close to Mr. Cohen, the executive agreed to share thoughts with The Observer only anonymously because of ongoing investigations. “And if the fire turns out to be small, it will be kind of embarrassing for them. But right now, the results don’t seem to be breathtaking.”
“It doesn’t make me nervous,” the hedge fund manager said late Monday night, annoyed that his digital copy of the new financial crisis book All the Devils Are Here wasn’t downloading properly. “But it does make me concerned that I’m going to get some willy-nilly subpoena–and something to write about in the press. And it’s going to concern my investors, and it’ll be bad for business, and it will take however long to defend myself.”