(NECN: Peter Howe, Wellesley, Mass.) A fast-escalating federal probe of insider trading by secretive hedge funds hit New England money-management capitals with full force Monday.
Outside the offices of Loch Capital on Federal Street in Boston's Financial District, there was a steady stream of foot traffic from vehicles with FBI and Massachusetts State Police markings. Loch is a $700 million hedge fund where FBI agents executed search warrants Monday -- one of three in New England.
Todd McSweeney and twin brother Timothy McSweeney, Lexington, Mass., natives and Clark University undergrad and Northeastern University business graduates, run the fund, which focuses on technology investing.
The McSweeneys are reportedly close to Steven Fortuna, another Boston hedge-fund manager who has pleaded guilty and turned government witness in the $3.7 billion Galleon Fund insider-trading case. The FBI gave no indication whether Loch Capital is a target of a probe or facing charges or if they were seeking information there to use against someone else.
Also raided by FBI agents Monday were two other hedge funds from Connecticut's Fairfield County "gold coast" investment hub, $4 billion Diamondback Capital of Stamford and $3 billion Level Global, headquartered in Greenwich. Diamondback had no comment but a Level Global spokesman confirmed FBI agents "visited as part of what we believe to be a broader investigation of the financial services industry.'' Level Global said it is cooperating fully and "remains operational" for investors.
The raids come amid widespread reports, including a top-of-page-one story in Saturday's Wall Street Journal, the feds are closing in on exposing what may be the biggest insider trading network ever.
Babson college lecturer Peter Cohan's been following the investigation closely and writing extensively about hedge-fund abuses at www.bloggingstocks.com . "Based on the clues that are out there now, I think they've probably gotten some people to wear wires, and what those people who've worn the wires have come up with is that there was some insider trading going on'' in various industry sectors, particularly health-care mergers and acquisitions, Cohan said.
One area cited by the journal that Cohan calls a key issue: So-called expert networks, where people get paid by hedge funds to give them industry insights and have to attest they won't violate laws around sharing "material non-public information" or company secrets.
"I belong to a couple of these things, and what happens is the hedge funds will pay a person who's an expert a couple hundred dollars an hour -- and usually they only talk to you for half an hour -- to ask you questions about a company or an industry and based on those answers they will make investments,'' Cohan said. He's never been in a position of having any insider information to share, but Cohan said he suspects -- as alleged in the Galleon case and others -- expert networks all too often become a conduit for illegal insider information.
"The short-term impact of this on the market is going to be to make a lot of people nervous who are participants in the market, the big institutional investors, but hopefully over the long term, people will start to see that" regulators and authorities are "actually going to regulate insider trading and try to make the markets fairer.''
With $1.7 trillion now invested with hedge funds, what is certain is there is no shortage of pressure on fund managers to find special advantages to make their investors, and themselves, more money.
With photographers Bob Ricci and Todd LaBrecque and editor Nick Chin