Just because there’s only been one arrest in the wake of last week’s FBI raids and multiple subpoenas, does not mean that serious and long-lasting damage has not been done to the hedge funds involved.
Reuters has a good survey of legal opinions suggesting that there will almost certainly be enduring, negative consequences.
“In the financial world, you are often guilty until proven innocent, not the other way around,” one expert explained.
William Brandt, who advises troubled hedge funds, also said that while such investigations don’t necessarily mean certain death for a firm, “it is pretty close.”
- “FBI raids are rare on Wall Street.” Usually, prosectors just get a subpoena to extract the information they need. A raid is a big deal – apparently FBI agents ordered Diamondback employees to put their hands in the air as they stormed the hedge fund – and is generally used usually to bust up “the likes of “pump and dump” brokerages that are selling worthless stock to the public.” (This is good news for SAC Capital, and bad news for Level Global, Diamondback and Loch Capital).
- More back-and-forth means more redemptions. Even without images of feds rolling in and out of your offices with boxes of paper, just the implication of shady dealings is damaging. Loch Capital apparently already saw massive withdrawals simply because the fund was mentioned in relation to the Galleon probe. And Frontpoint has apparently received requests for about $3 billion in redemptions after it was implicated in another insider trading case.
- Costs are going to increase and less money will be coming in. Top employees looking for employment elsewhere may require more money to stay put, but investments will be dwindling.
- History repeats itself. Art Samberg liquidated his fund, Pequot Capital, months before he settled an insider trading case. And more recently, FrontPoint liquidated its health care fund after it was implicated in another insider trading scandal.
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