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Insider Trading Probe Shutters $4 Billion Hedge Fund

Friday, 11 Feb 2011 | 1:32 PM ET

So the government has killed Level Global Investors LP.

This morning David Ganek sent a letter to investors in the $4 billion hedge fund announcing that it expects to sell all of its holdings by the end of March.

Ganek founded Level Global in 2003 with Anthony Chiasson. Both are alumni of Steven Cohen's SAC Capital Advisors.

Level Global was one of four hedge funds raided by the FBI in November as part of the government's insider-trading crusade. It hasn't been accused of any wrong doing. But the investigation nonetheless destroyed the firm.

DealBreaker's Bess Levin obtained the letter to investors. In it,Ganek explains how the investigation worked its destructive powers:

Unfortunately, the ongoing Government investigation presents significant challenges to maintaining our collective focus. As we have communicated to you previously, Level Global is not a target of the Government's investigation, nor has the firm been alleged to have engaged in any misconduct. That status has not changed.

We have also communicated to you that we were working with outside legal advisors to perform an independent review of our electronic communications and technologyrelated trading records, and to conduct a series of interviews. To that end, we granted external legal counsel unfettered access to our records and placed no limitations on the scope or depth of their inquiry. After learning the results of their in-depth review, I remain highly confident that my conduct in leading the firm and its investment process was lawful and ethical at all times.

Nevertheless, the Government has commenced what may be a lengthy inquiry with no set timeline. This process, even when it leads to the positive outcome that counsel expects, nonetheless threatens to undermine our ability to meet our fiduciary responsibility to our investors. With the continuing cloud of uncertainty, we understand why investors might elect to redeem in the current environment. Our move to substantially more liquid terms for investors means that approximately 75% of our capital is eligible to leave on the next redemption date, March 31, and 100% will be eligible on June 30. We simply would not be able to run Level Global in a manner meeting our high standards if our capital base were to be significantly reduced. In addition, irrespective of whether there are high levels of redemptions, the persistent threat of capital leaving the Funds would prevent us from taking risk and investing with conviction the way we always have.

It's a good reminder that the federal obsession with insider trading has serious costs, despite providing little or no benefits to investors.

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