US insider trading probe takes toll on small funds

Date: Tuesday, February 1, 2011
Author: Emily Chasan and Matthew Goldstein, Reuters.com

Technology-focused hedge fund STG Capital, which did business with an expert network firm that has figured prominently in an ongoing U.S. insider trading investigation, is shutting down, said people familiar with the situation.

Steven T. Glass, the founder of STG, which once had more than $200 million under management, notified investors last week he was shutting down his fund, said one investor familiar with the situation, who declined to be identified.

STG is the second New York hedge fund to shut down in the wake of a series of arrests of people associated with Primary Global Research, a California-based expert network firm that matches hedge funds with industry consultants.

The Wall Street Journal reported on Monday that Barai Capital Management, a small $80 million hedge fund raided by federal agents in November, is also closing.

Four people familiar with the investigation said both STG and Barai regularly employed Primary Global consultants to gather information on tech stocks.

Glass said in an email that his fund's relationship with Primary Global had nothing to do with the closing, but he declined to elaborate.

"You are factually incorrect in much of that, sir," he said. "As I informed our investors last week, assets were not at a critical mass to sustain the business."

SNAIL'S PACE

Glass opened the fund in 2002 after a stint as a trader at Kingdon Capital Management. He also previously worked at Credit Suisse Group AG and Deutsche Bank AG. Glass' fund, which most recently had about $150 million, was up about 8 percent last year, said an investor source. That compares with gains of about 17 percent in the tech-heavy Nasdaq.

According to SEC filings, some of STG's top stock holdings as of Sept. 30 were STG Semiconductor Corp, Qualcomm Inc and Apple Inc.

The closing of STG Capital was reported last week by Dealbreaker.com. The popular Wall Street blog did not offer any explanation for the closing of the fund, which takes its name from its founders initials.

Neither Glass nor anyone associated with STG has been charged in the investigation, which involves allegations of industry consultants passing on confidential corporate information to hedge fund traders and analysts.

So far, at least eight people with links to Primary Global have been charged with helping to leak confidential information to hedge fund customers. Federal prosecutors have also secured guilty pleas from a number of cooperating witnesses and sources say authorities are likely to make a new round of arrests in coming weeks.

The $1.9 trillion hedge fund world was rocked in November when agents with the Federal Bureau of Investigation raided three funds in connection with the insider trading investigation on Nov. 22. Soon after, federal prosecutors in New York sent out dozen of subpoenas to hedge funds and mutual funds that did business with a variety of expert network firms and consultants, including Primary Global.