Three Hedge Funds Raided As Insider Trading Probe Widens

FBI agents raided the offices of three hedge funds Monday with more expected to follow as part of a broad insider trading investigation.

Authorities had raided the Connecticut offices of Diamondback Capital Management and Level Global Investors. Both funds are run by former managers of Steve Cohen's SAC Capital Advisors. The raids were first reported by The Wall Street Journal and confirmed by CNBC.

The third raided hedge fund is Loch Capital Management. It is based in Boston, is headed by Timothy and Todd McSweeney. The brothers are acquaintances of Steven Fortuna, a hedge-fund manager who pleaded guilty in the Galleon case and agreed to cooperate in that investigation, the Journal reported.

David Ganek, a former SAC trader, manages about $4 billion in assets through Level Global Investors. Diamondback Capital Management oversees more than $5 billion, while Loch Capital Management maintains $750 million in assets, the Journal said, citing SEC filings.

"We received an inquiry this morning from the FBI," Diamondback Capital said in a statement. "Diamondback is voluntarily cooperating. The firm is fully operational and we, along with our team, continue to manage the portfolio and Diamondback's business for the benefit of our investors."

A spokesman for Level Global confirmed that federal agents had searched the company's offices and that the hedge fund is cooperating with authorities. A lawyer for Loch Capital declined to immediately comment on Monday, the Journal reported.

The raid follows a Journal report this weekend that federal authorities were preparing a slew of insider trading chargers against the $1.7 trillion hedge fund industry. The probe into allegations of widespread misconduct will likely involve consultancies, investment banks and trading firms, reported the Journal.

The charges, which could be filed as soon as this year, would be on top of those made in an existing case against Raj Rajaratnam and his hedge fund, the Galleon Group.

Twenty-three former hedge fund managers, lawyers and others have faced criminal or civil charges in the case, which prosecutors called the largest insider trading case in hedge fund history. Fourteen have pleaded guilty to criminal charges, eight have pleaded not guilty and one is at large.

Although it has not been implicated in any of the charges, Goldman Sachs shares suffered today amid worries that the bank may be embroiled in the investigation.