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U.S. Attorney for the Southern District of New York Preet Bharara (SHANNON STAPLETON)
U.S. Attorney for the Southern District of New York Preet Bharara (SHANNON STAPLETON)

FBI raids 3 hedge funds in insider probe Add to ...

A hedge fund with ties to legendary investor Steven Cohen was among those raided by U.S. federal agents on Monday as part of a sprawling investigation into insider trading.

The raids targeted two Connecticut hedge funds, Diamondback Capital Management and Level Global Investors, as well as Loch Capital Management, which is based in Boston.

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The searches appear to signal an escalation in a long-running investigation targeting the illegal use of insider information. So far no one has been charged in the probe, though cases could be filed within weeks.

A spokesman for Level Global confirmed in a statement that agents from the Federal Bureau of Investigation had visited its office and said the firm was co-operating fully with authorities.

Two of the hedge funds raided on Monday - Level Global and Diamondback - are run by former employees of SAC Capital Advisors, one of the world's most successful and well-known hedge funds. Steven Cohen, SAC's founder, is a legend in the financial world, both for his trading acumen and his taste for expensive artwork.

U.S. authorities have tried at various points to get more information about SAC's activities. As part of the current investigation, FBI agents wanted an independent analyst named John Kinnucan to tape his calls with SAC traders, the Wall Street Journal reported Monday, suggesting increasing scrutiny of the firm.

In an earlier insider trading probe, federal authorities tried to get a co-operating witness, a former SAC employee, to return to work at the firm. The trader, who worked at the fund from 1999 to 2004, had agreed to provide information to prosecutors as part of a plea agreement.

A spokesman for SAC declined to comment. SAC has not been accused by authorities of any wrongdoing.

Mr. Cohen, SAC's founder, is notoriously private, despite his penchant for buying high-profile pieces of art. He owns paintings by Pablo Picasso, Vincent van Gogh and Claude Monet. He reportedly paid $8-million (U.S.) for a work by Damien Hirst that consists of a shark in a tank of formaldehyde.

Of late, he and his firm have received a fair amount of unwanted attention. In a strange case concluded earlier this month, a Brooklyn rabbi was convicted of blackmailing SAC. The rabbi, Milton Balkany, claimed to act as spiritual adviser to an inmate who had told him that SAC engaged in insider trading. Mr. Balkany said he would hush up such allegations in exchange for $4-million, half of which would go to the school he founded.

Last year, Mr. Cohen's former wife filed a lawsuit alleging he had defrauded her of millions of dollars and claiming he had traded on non-public information back in the 1980s. The couple divorced in 1990. In January, an SAC spokesman said the "decades-old allegations" by Mr. Cohen's ex-wife were "patently false and entirely without merit."

Also this month, SAC resolved a long-running dispute with a Canadian pharmaceutical company once known as Biovail Corp. In 2006, Biovail accused SAC and other hedge funds of colluding to drive down its share price in a lawsuit that was later dismissed. Valeant Pharmaceuticals International Inc., which merged with Biovail this year, agreed to pay $10-million in damages to settle a counterclaim by SAC.

One of the hedge funds targeted in Monday's raids, Diamondback Capital, manages $4-billion in assets and was founded in 2005 by three former SAC traders, Richard Schimel, Lawrence Sapanski, and Chad Loweth. Mr. Schimel is Mr. Cohen's brother-in-law.

Level Global was founded in 2003 by David Ganek, an SAC veteran, and manages $3-billion. In April, it sold a minority stake to a leveraged-buyout firm run by Goldman Sachs Group Inc., Petershill Fund Offshore LP.

Loch Capital Management, the Boston-based firm, focuses on technology stocks. Its founders are reportedly acquaintances of a co-operating witness in another gigantic insider-trading case centred on Raj Rajaratnam, the co-founder of hedge fund Galleon Group. Fourteen people have already pleaded guilty to criminal charges in that probe.

Monday's raids show that "the government has decided it needs to use force to obtain" necessary information, said Jacob Frenkel, a former federal prosecutor and lawyer with the Securities and Exchange Commission. Mr. Frenkel said it's likely the government has co-operating witnesses providing information that would help secure warrants from federal judges.

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