Clients of investment advisers aren't waiting to find out how the story ends.  They don't want to expose their investments to the uncertainty of a potentially prolonged and highly-publicized federal investigation.  Take, for example, star manager David Ganek, who's shuttering his highly successful 8-year old hedge fund Level Global Investors LP.

In November, the FBI raided the company's offices overlooking New York's Central Park as part the ongoing insider trading investigation that was launched one year earlier with the arrest of Galleon Group's Raj Rajaratnam.  By February 11, Mr. Ganek told the 61 employees of Level Global Investors LP that he was shutting the hedge fund he co-founded 8 years earlier.  Even though the $4 billion firm hadn’t lost money, and no senior people had quit.  And, to this day, no one at the firm has been charged and the firm maintains it isn’t a target of the probe.

    What Happened in the Interim.  Within weeks of the FBI raid, investors started to pull money.  The damage was done.

"When the feds knock on your door, it’s game over.  Integrity is all you have in this business."  -- Brad Alford, head of Alpha Capital Mgmt in Atlanta. 

Large, publicly traded companies often survive the arrest and incarceration of its top officer - as in the case of Martha Stewart and Tyco's Dennis Kozlowski.  Hedge funds, however, are smaller and almost always privately held, and thus more fragile.  Their success often depends on the investment skills of the founders and the trust placed in them by their investors.  And on ability to quell a withdrawl by one or more significant investors.  

"The practical reality is that if everyone else is going to pull out, then you have to pull out. That’s the nature of the business."  -- Craig Slaughter of the W. VA Investment Mgmt Board, which had $50mn of its $12.5bn invested with Level Global.

Of the 4 hedge funds raided in November, Level Global and Barai Capital Management LP in New York have announced they are closing.  Diamondback Capital Management LLC, which placed one of its technology portfolio managers on leave following the FBI raid, had investors pull about 23% of its assets under management.  Loch Capital Management LLC hasn’t returned phone calls since the raid. No one at the firm has been charged. 

For the complete story, go to:   [Bloomberg, 3/4, "Insider-Trading Probes.."]