The Day of Hedge Fund Reckoning: FBI Raids Three Giants

The massive FBI probe into insider trading reported this weekend is already causing major headaches up in Connecticut. The Wall

The massive FBI probe into insider trading reported this weekend is already causing major headaches up in Connecticut. The Wall Street Journal is reporting that the FBI is raiding the Connecticut offices of two hedge funds, Level Global and Diamondback Capital Management, along with Boston’s Loch Capital Management. The raids are part of a massive federal investigation into insider trading across much of the financial-services industry, including Goldman Sachs (GS).

The Connecticut hedge funds are offshoots of the billionaire Steven A. Cohen’s eponymous hedge fund, SAC Capital Advisors. Level Global, run by ex-Cohen employee David Ganek, who started the fund in 2003, was running around $4 billion earlier this year. Diamondback, meanwhile, made its debut in 2005 and controls roughly $5 billion, The Journal said. Its manager, Richard Schimel, is a former portfolio manager at SAC Capital.

Loch, run by the brothers Timothy and Todd McSweeney, has been connected to the gargantuan insider-trading case against the hedge fund Galleon–which, in turn, has been said to also be focused on Mr. Cohen.

Mr. Cohen, nicknamed “Sith Lord” in certain corners of the country, is no stranger to legal disputes. As Dealbreaker reported in 2009, his ex-wife Patricia sued him and his brother Donald for concealing his marital assets from her. (Her lawsuit eventually became quite complicated). In August 2009, a judge dismissed a suit against SAC by drug company Biovail, which accused SAC of colluding with other firms to push down its share price.

Diamondback has experienced several high-level departures in recent months. Partner Larry Petrella, who left Lehman in 2000 before joining Diamondback in 2005, left the firm a little over two months ago to join up with Tudor Investment–another eponymous hedge fund, run by Paul Tudor Jones. Diamondback co-founder Chad Loweth left in June.

Level Global issued a statement to The Journal:

We can confirm that agents from the Federal Bureau of Investigations visited our offices this morning as part of what we believe to be a broader investigation of the financial services industry discussed in media reports over the weekend. We are cooperating fully with the authorities and, at the same time, we are fully operational and continue to work diligently for the benefit of our investors.


Besides its wonderful story about the wine-sipping John Kinnucan, The Journal is also focusing on Joseph F. “Chip” Skowron III, a doctor who gave up a Harvard residency to work for SAC Capital partners as a health care analyst. He subsequently joined FrontPoint Partners, where he managed $1 billion. Skowron owns a house that’s worth a little less than $6 million, and has rubbed elbows with assorted high-society types. He’s also run into a spot of legal trouble:

On Nov. 2 … [t]he U.S. Attorney’s office in Manhattan and the Securities and Exchange Commission unveiled an insider-trading case, charging French doctor Yves M. Benhamou with sharing confidential drug-trial data with a hedge fund.

The court documents said tips Dr. Benhamou provided about a company called Human Genome Sciences Inc. enabled one fund to avoid $30 million in losses in late 2007 and early 2008. FrontPoint Partners, which wasn’t named in the complaint, confirmed it was the fund referenced in the documents.

On the other hand:

According to people familiar with the matter, the charges against Dr. Benhamou don’t have a direct connection to a vast insider-trading probe reported by The Wall Street Journal on Saturday, in which authorities are investigating, among other things, whether analysts and consultants for these types of firms have passed along nonpublic information.

Front Point shuttered its health care fund just last week, amid insider-trading allegations. The firm’s Steve Eisman, iconic for his bet against the housing bubble, seems to have inspired the rousing mortgages speech Gordon Gekko gives in the otherwise non-rousing Money Never Sleeps.

[Updated throughout the afternoon]

mtaylor [at] | @mbrookstaylor

The Day of Hedge Fund Reckoning: FBI Raids Three Giants