Diamondback Capital Management and Level Global, 2 of 3 hedge funds raided last week by the FBI, wrote to clients on Monday, saying they're not targets of the government’s inquiry. The third hedge fund raided by federal agents was Loch Capital Management (Boston, MA).

Diamondback (Stamford, CT) further noted in its letter that it had been served with a grand jury subpoena “seeking a broad range of information in connection with the firm’s trading and research activities.”  Co-CIOs Richard Schimel and Lawrence Sapanski, who together wrote the letter, noted that the inquiry focused on one portfolio manager at the firm and one former employee who reported to the manager.  That manager, who was not identified in the letter, was placed on leave from the company. 

“As has been widely reported, one of the principal areas on which the government appears to be focused is the use of industry research consultants,” the letter said. “Among our approximately 135 investment professionals, several work with research consultants.”  “The firm has for some time maintained a written policy and set of procedures that are expressly designed to avoid having any employee receive or misuse material non-public information when using research consultants.”

In the letter from Level Global (New York, NY), investors were told that the firm had pledged to cooperate with the U.S. attorney’s office, “which at times may make it impossible to answer each and every one of your questions.” The firm provided no further details about the focus of the inquiry. 

The letters follow the arrest of Don Chu, a research firm executive, Wednesday on charges he helped hedge funds obtain improper information about publicly traded companies.  Mr. Chu, who works at Primary Global Research, a so-called expert-network firm that offers “market intelligence” to hedge funds and other money-management outfits, was accused of arranging for his hedge fund clients to get inside tips on technology companies.   [NYT Dealbook, 11/29]