By the summer of 2009, the billionaire investor Steven A. Cohen appeared to be growing suspicious that federal authorities were gathering evidence about insider trading in the hedge fund industry.
When a former employee approached Mr. Cohen that summer, seeking a job at SAC Capital Advisors, his hedge fund, Mr. Cohen called a friend at another hedge fund and told him to be careful about talking to the former trader, according to people briefed on the matter.
The phone call, which has not been previously reported, suggests that Mr. Cohen and potentially others in the hedge fund industry were gradually becoming aware of the broad investigation into insider trading, despite attempts by authorities at that time to keep it secret.
Indeed, word of the investigation was beginning to leak even as federal authorities were getting court approval that summer to place a wiretap on a phone at Mr. Cohen's 35,000-square-foot mansion in Greenwich, Conn., for the first and only time.
(Read more: Should insidertrading really be considered a crime?)
Such awareness of an undercover investigation, months before it became publicly known, could have hurt the effort by federal investigators, who have been frustrated in trying to find evidence from wiretaps or emails that might link Mr. Cohen to any wrongful trading despite years of focusing on him. Federal authorities were unaware of Mr. Cohen's phone call to Richard Grodin, who at the time was running a fund called Quadrum Capital, said two people briefed on the matter who had knowledge of the investigation but were not authorized to discuss it.
The 2009 wiretap on Mr. Cohen's home, where the noted art collector keeps a yellow Jeff Koons balloon dog sculpture on his lawn, produced little in the way of incriminating evidence and was discontinued, said the people briefed on the investigation, who were not authorized to discuss it. These same people said that previous reports that authorities had wiretapped Mr. Cohen's home phone in 2008 were erroneous.
Another area of frustration for investigators has been a lack of instant message conversations involving Mr. Cohen. The hedge fund owner, like most others at SAC, was a frequent user of AOL instant messaging services during 2007 and 2008, the period during which the undercover investigation began gathering steam. During the trading day, the best way to get Mr. Cohen's attention was to send him an instant message, the people briefed on the matter said. But the hedge fund, as a general rule, did not save I.M. conversations before 2009.
In the 2009 phone call, which was not recorded in a wiretap, Mr. Cohen told Mr. Grodin that he believed Richard Choo-Beng Lee, a technology stock trader, might be cooperating with federal authorities, even taping telephone calls with people he knew in the industry, said people briefed on the matter who did not want to be identified. Mr. Cohen suggested that Mr. Lee, who had once worked for both men, might be trying to implicate others, the people briefed on the matter said.
Mr. Grodin, who had worked for SAC Capital five years earlier, was surprised. He doubted that Mr. Lee, known as C. B. to his friends, would cooperate with federal authorities in an investigation of the industry, the people briefed on the matter said.
But by October 2009, Mr. Cohen's warning about Mr. Lee would ring true when federal prosecutors disclosed that he had been working with them for months, taping conversations with people in connection with an investigation that led to the arrest of the hedge fund billionaire Raj Rajaratnam that month.
Mr. Cohen, 57, has not been accused of any criminal wrongdoing. A spokesman for Mr. Cohen declined to comment.
A lawyer for Mr. Grodin did not return calls seeking comment.
Federal authorities continue to pursue Mr. Cohen, who was widely regarded on Wall Street as one of the best stock traders of his generation. Last month, his firm pleaded guilty to insider trading and agreed to pay a $1.2 billion penalty and stop managing money for wealthy investors, pensions and institutional investors.
The closest authorities have come to tying Mr. Cohen to improper trading at his firm is a civil failure-to-supervise action filed against Mr. Cohen by the Securities and Exchange Commission.
But the phone call to Mr. Grodin suggests that Mr. Cohen may have had more insight in 2009 into the investigation being conducted by the United States attorney's office in Manhattan and the F.B.I. than others in the hedge fund business did. The investigation has led to the convictions or guilty pleas of 77 traders, analysts and industry consultants — including seven people who worked for Mr. Cohen's fund.
It is unclear exactly when Mr. Cohen phoned Mr. Grodin, but the call appears to have coincided with an attempt by Mr. Lee to persuade Mr. Cohen to give him a job at SAC, where he had worked from 1999 to 2004. Mr. Lee was seeking either a full-time job or a consulting job with SAC, shortly after he began secretly cooperating with federal investigators in April 2009. Federal authorities had Mr. Lee call and tape the conversation with Mr. Cohen.
A person briefed on the matter who was not authorized to speak publicly about the investigation said Mr. Lee's call to Mr. Cohen was useful in enabling federal authorities to persuade a federal judge to approve a brief wiretap on Mr. Cohen's mansion.
Born in Malaysia, Mr. Lee, 57, who at the time of the investigation was living in California, was one of the first hedge fund traders to begin cooperating with the investigation. Mr. Lee and his business partner, Ali T. Far, shuttered their hedge fund, Spherix Capital in San Jose, Calif., and agreed to cooperate after the government gathered incriminating evidence against them, some of which was obtained through a 2008 wiretap on Mr. Lee's cellphone. Both men pleaded guilty to insider trading charges.
Mr. Lee provided federal authorities with a list of stocks he used inside information to trade on while working at SAC and also names of people who had provided him with inside information, according to court documents. He also helped authorities better understand how SAC was organized and how traders and analysts were supposed to pass on their best ideas each week to Mr. Cohen and his trading team.
But Mr. Lee was not particularly skilled at undercover work, several lawyers with knowledge of the investigation said, and his attempts to get people to incriminate themselves while in taped conversations were awkward at best.
In a 2011 deposition in a lawsuit, Mr. Cohen, when asked why he turned away Mr. Lee when Mr. Lee came to him seeking a job, said he and others at his firm "had suspicions about his intentions." Mr. Cohen added there were "rumors from people on the street" that Mr. Lee "was wearing a wire," according to the deposition.
Jeffrey L. Bornstein, a lawyer for Mr. Lee, said he could not comment on anything specific his client might have done to assist federal investigations. He added that Mr. Lee "continues to cooperate fully with the federal authorities."
Some federal authorities investigating Mr. Cohen say they believe that any case against the billionaire investor might be made only with the help of a cooperating witness who can directly tie him to any wrongful trading.
People briefed on the investigation, for instance, say prosecutors remain interested in learning what Mathew Martoma, a former SAC money manager, can tell them about a 20-minute call he had with Mr. Cohen in July 2008, shortly before the firm began unloading big positions in shares of Elan and Wyeth.
Mr. Martoma is charged with using inside information to help SAC avoid losses and generate trading profits of $276 million on shares of those two pharmaceutical companies. Prosecutors claim Mr. Martoma recommended that SAC sell those shares after receiving inside information about problems with a clinical trial for an experimental Alzheimer's drug the two companies were working on. Mr. Martoma, who maintains his innocence, is set to go on trial on Jan. 6 in the Federal District Court in Lower Manhattan.
Mr. Lee, for his part, remains in limbo. Despite being one of the first to plead guilty, he has never been sentenced. The last court filing in his case was a letter from prosecutors on Sept. 27, 2011, to the judge that said Mr. Lee's sentencing could take place after Jan. 3, 2012.
Two years later, there has been no update on his sentencing.
—By Matthew Goldstein of The New York Times