Diamondback Hedge Fund Gets U.S. Grand Jury Subpoena

Date: Tuesday, November 30, 2010
Author: Saijel Kishan and Patricia Hurtado, Bloomberg

Diamondback Capital Management LLC, one of three hedge funds raided by the FBI last week, said it received a federal grand jury subpoena and is cooperating in a U.S. probe that it said includes research consultants.

The firm, based in Stamford, Connecticut, said it was told by the government it isn’t the target of the probe and that the raid was focused on one of its portfolio managers, who was put on leave, according to a letter to sent to investors yesterday.

“The warrant appears to be focused on a single employee (a portfolio manager), as well as on a former employee who reported to that employee,” Diamondback co-founders Lawrence Sapanski and Rich Schimel said in the letter, a copy of which was obtained by Bloomberg News. “One of the principal areas on which the government appears to be focused is the use of industry research consultants.”

Hedge funds Level Global Investors LP and Loch Capital Management also had their offices raided by the FBI on Nov. 22. Janus Capital Group Inc. and Wellington Management Co. were among firms that received information requests last week as part of the government’s insider-trading investigation.

Level Global, with offices in New York and Greenwich, Connecticut, said in a letter to investors that it met with the U.S. Attorney’s Office on Nov. 23 and that the government said yesterday it wasn’t a target of the probe.

“Nor, in fact, has the firm been alleged to have engaged in any misconduct or wrongdoing,” Level Global said in the letter, a copy of which was obtained by Bloomberg News.

Holder Confirms

U.S. Attorney General Eric Holder confirmed yesterday that the Justice Department is conducting a criminal investigation related to illegal trading on Wall Street.

In response to questions about the probe of insider trading, Holder said an “investigation is ongoing” and described it as “very serious.” Holder was questioned at a news conference at the Justice Department in Washington.

“I don’t want to get into the details,” he said. The investigation is being conducted by the office of U.S. Attorney Preet Bharara in Manhattan, Holder said.

Jessie Erwin, a spokeswoman for Bharara’s office, declined to comment on the investigation. Jim Margolin, a spokesman for the Federal Bureau of Investigation’s New York office, also declined to comment.

Diamondback said yesterday that the federal grand jury subpoena it received “is similar to those received by many other market participants.”

‘Fully Cooperating’

The fund said that it received a subpoena “seeking a broad range of information in connection with our trading and research activities” and that it is “fully cooperating” with producing the information sought by the U.S.

Diamondback, which oversees about $5.8 billion in assets, said several of its 135 investment professionals use industry research consultants.

The firm has a policy and set of procedures designed to avoid having any employee receive or misuse material nonpublic information, according to the letter.

A day after the FBI searches, Steven A. Cohen’s SAC Capital Advisors LP got a government subpoena, said a person familiar with the matter who declined to be identified because the matter is private. No allegation of wrongdoing has been made against SAC, which manages $12 billion. Jonathan Gasthalter, a firm spokesman, declined to comment.

Chu Arrested

Don Ching Trang Chu, an employee of expert-network firm Primary Global Research LLC in Mountain View, California, was arrested on Nov. 24 for allegedly providing insider information to hedge funds. He was charged in a criminal complaint filed by Bharara’s office.

Chu had a roster of Asia-based employees of North American technology companies to feed information to clients, according to court documents.

In several conversations recorded by the FBI as part of its probe, Chu, who was born in Taiwan and became a U.S. citizen in 1987, describes his access to numerous contacts in Asia who were willing to share financial information about their employers, including Broadcom Corp.

An unnamed employee of the Irvine, California-based company “probably gave Broadcom’s revenue numbers before Broadcom’s quarter end because that is what he does,” Chu is quoted as saying in the complaint.

Broadcom’s Cooperation

Broadcom, the biggest maker of chips for television set-top boxes, said yesterday that it has been in contact with the U.S. government and is cooperating with an insider-trading investigation.

None of the employees of the company referred to in the criminal complaint against Chu are executive officers of Broadcom, said Bill Blanning, a company spokesman, in an e-mailed statement yesterday.

Two Broadcom employees whose names weren’t disclosed were providing information to hedge funds, according to the complaint against Chu. Broadcom has “strict policies” to prevent insider information being shared, Blanning said in his e-mail.

John Kinnucan, a technology research provider in Portland, Oregon, said he refused a request from the FBI to wear a hidden microphone to record investor-client conversations as part of its insider trading probe, he wrote in the New York Times.

FBI agents arrived unexpectedly at Kinnucan’s home, making it “abundantly clear” they believed he and his clients were “guilty,” and threatened to arrest him immediately, he said in an article published yesterday.

Kinnucan Contacted

Kinnucan, the founder of Broadband Research, whose clients include hedge funds, was contacted by the FBI as part of the government’s investigation of insider trading, according to the Times.

Kinnucan said agents arrived at his home and cited his research, “insinuating it was improper.”

“I had to decide between committing a wrong -- agreeing to try and entrap someone who, based on our mutual dealings, I believe to be innocent -- or standing up to fight for what I believe is right,” Kinnucan wrote in the Times. “I chose the latter.”

He said the type of research he provides to clients “is pervasive in the financial community” and that “research providers are constantly struggling with the question of what constitutes appropriate information.”

The case is U.S. v. Chu, 10-Mag-02625, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Saijel Kishan in New York at skishan@bloomberg.net; Patricia Hurtado in New York at pathurtado@bloomberg.net.