Some US money managers may find their New Year's Day hangover lasting well into 2011 as federal investigators step up arrests in a widening Wall Street insider trading probe.
Legal experts say Thursday's arrest of three technology company executives on charges that they leaked confidential information to various investment funds is the start of what likely will be a series of arrests by federal prosecutors over the next few months.
"I don't think there is any question that this will be a very long investigation," said Andrew Stoltmann, a Chicago-based securities lawyer. "Prosecutors are now going after the lower tier targets in clear hopes that they can flip these people into ultimately giving them the top guys at certain hedge funds."
One of those stockpickers now in limbo is Todd Newman, a portfolio manager at hedge fund firm Diamondback Capital Management. Newman was placed on a leave of absence soon after the offices of the Stamford, Connecticut-based firm were raided by federal agents on November 22, according to sources who confirmed his identity.
Newman, who managed a portfolio of technology stocks for Diamondback, could not be reached for comment at his suburban Boston home this week.
Seven days after the raid, Diamondback told investors that the firm is not a target in the government's probe and that it had placed one person on leave. It did not name the employee in order to protect his privacy.
The sources who identified Newman are familiar with the investigation but declined to be identified themselves because no charges have been filed against him. Newman joined Diamondback, whose assets under management are $US6 billion, in 2006.
Before joining the Diamondback, Newman was a technology stock analyst in Boston with Tudor Investment Corp, one of the world's most prominent hedge funds. There is no indication that authorities are looking at anyone associated with Tudor, said people familiar with the matter.
A Diamondback spokesman declined to comment. The hedge fund previously has said it is not a target of the federal probe.
Diamondback was one of three hedge funds raided late last month by federal authorities as part of the investigation which is largely focusing on the alleged misuse of secret corporate information obtained by traders and analysts from technology executives who moonlight as paid consultants for so-called expert networking firms.
The two other raided fund firms, Loch Capital Management and Level Global, also have said they are not targets of the investigation. Neither has suspended any of its employees.
Federal prosecutors followed up the raids by serving subpoenas seeking a broad range of documents and trading records from hedge funds and mutual funds. The subpoenas, according to people familiar with the investigation, demanded information about any work the investment funds did with expert network firms or a Portland, Oregon-based independent researcher John Kinnucan.
Some of the hedge funds and mutual funds that received subpoenas include Balyasny Asset Management, Citadel, Janus Capital Group, SAC Capital Advisors and Wellington Asset Management.
The flurry of subpoenas has sent some traders and analysts who relied on expert network firms scurrying to hire defense lawyers, said several lawyers who declined to be identified because their clients have not been charged with any wrongdoing.
One way to look at Thursday's arrests is as prosecutors firing a warning shot across the bow of the hedge fund and mutual fund industries, legal experts say. They note that the criminal complaint filed on Thursday makes clear that authorities have hours of secretly recorded conversations between some of the consultants and the traders and analysts who paid for their services.
The criminal complaint also reveals that one of the government's cooperating witnesses is a former analyst with a hedge fund in New York.
In all, prosecutors said they had five cooperating witnesses, including Daniel DeVore, a former Dell global supply manager, who worked as consultant for expert networking firm Primary Global Research.
"There are users of expert networks, be they hedge funds or mutual funds, that have been known to put a good bit of pressure on the experts to give them more than what they know is permissible information," said Sean O'Malley, a partner with White & Case. "And anyone who put that kind of pressure on an expert should be very worried right now."
Reuters