The FBI has raided three hedge funds, part of a widening investigation of suspicions of pervasive insider trading in the $1.7 trillion hedge fund industry.
The funds include Diamondback Capital Management LLC and Level Global Investors LP, two Connecticut funds run by former managers of Steven Cohen's SAC Capital Advisors.
The third fund is Boston-based Loch Capital Management, a person familiar with the raid said. Loch has had close ties with a witness who pleaded guilty in a separate insider trading probe that centers on hedge fund Galleon Group.
The raids come as federal prosecutors prepare to unveil a series of new insider trading cases against hedge fund traders, consultants and Wall Street bankers, several lawyers familiar with the investigation said.
Prosecutors have called the Galleon case, centered on fund founder Raj Rajaratnam, the largest U.S. hedge fund insider trading case ever. Twenty-three people have faced criminal or civil charges in that case, which was revealed 13 months ago.
"The Justice Department promised a more muscular approach to white-collar crime, and is delivering," said Eugene O'Donnell, a professor at the City University of New York's John Jay College of Criminal Justice.
Charges may come soon
Spokesmen for the Federal Bureau of Investigation in New York and Boston said on Monday that the agency had executed search warrants in connection with an ongoing investigation.
They declined to discuss the nature of the probe or the targets.
Started in 2005, Diamondback oversees roughly $5 billion of assets and is based in Stamford, Connecticut.
Level Global has roughly $4 billion of assets and was created by SAC alumnus David Ganek.
Loch once invested more than $2 billion, but this year shed many of its U.S.-listed holdings, regulatory filings show.
Andrew Merrill, a Level Global spokesman, said FBI agents "visited our offices this morning as part of what we believe to be a broader investigation of the financial services industry." He said the firm is cooperating and "fully operational."
Diamondback also confirmed the FBI's inquiry, and said it is cooperating and "fully operational."
Loch did not immediately return requests for comment.
Lawyers familiar with the expanded U.S. trading probe said charges could be filed this year, and come in several cases rather than one large case targeting the hedge fund industry. The lawyers asked not to be named because the investigations are ongoing.
Some of these lawyers said one part of the probe appears to focus on former SAC traders and managers at hedge funds that traded in similar stocks. SAC declined to comment.
Authorities are examining the use of so-called "expert network" firms that command big fees from hedge funds to match them with experts in particular industries.
These authorities are also examining whether investment bankers and others tipped off traders to news concerning buyouts of pharmaceutical companies.
"The end game is deterrence," O'Donnell said. "The number of prosecutions will always be small, but deterrence can have a multiplier effect that stops untold numbers of other people from doing this kind of conduct."
Goldman Sachs Group Inc shares fell as much as 4.9 percent Monday after the Wall Street Journal over the weekend said the Justice Department is examining whether bank employees leaked information about mergers to clients. Shares closed at $161.05, down 3.4 percent.
A Goldman spokesman declined to comment. The newspaper had reported the raids on the hedge funds earlier Monday.
Speaking last month to the New York City Bar Association, U.S. Attorney Preet Bharara in Manhattan called insider trading a "rampant" problem that prosecutors need more tools to fight.
Bharara said the increased speed and volume of trading makes it harder to pinpoint specific illegal trades, and that a "veritable explosion of newsletters, websites, blogs, tweets, and feeds" can make it easier for the accused to argue that they traded based on information obtained legally.
In the Galleon case, U.S. District Judge Richard Holwell is expected to rule soon over whether prosecutors may use thousands of wiretapped conversations involving Rajaratnam and his alleged accomplices. Rajaratnam's criminal trial is expected to start in January.
Among the 14 people to plead guilty in the Galleon case is Steven Fortuna, a former managing director at Boston hedge fund S2 Capital LLC and a friend of Loch's co-founders, brothers Timothy and Todd McSweeney.