By Saijel Kishan and Katherine Burton
March 4 (Bloomberg) -- On the morning of Feb. 11, David Ganek gathered employees in the New York offices of Level Global Investors LP to tell them he was shutting the hedge fund he co- founded eight years earlier.
The $4 billion firm hadn?t lost money. No senior people had quit. What spurred Ganek?s decision was a November raid by the Federal Bureau of Investigation of the company?s offices overlooking Central Park, part of the U.S. government?s investigation into insider trading.
Within weeks, investors started to pull money, even though none of Level Global?s 61 employees had been accused of wrongdoing. To this day, no one has been charged and the firm maintains it isn?t a target of the probe. Still the damage was done.
?When the feds knock on your door, it?s game over,? said Brad Alford, head of Alpha Capital Management LLC in Atlanta, which invests in hedge and mutual funds on behalf of wealthy clients. ?Integrity is all you have in this business.?
The insider-trading case that started with the October 2009 arrest of Raj Rajaratnam, co-founder of New York-based hedge fund Galleon Group, has sparked three dozen arrests and two dozen guilty pleas from hedge-fund managers, corporate executives and industry consultants. It?s expanded into the largest insider-trading investigation in U.S. history.
Fragile Trust
When a high-ranking executive of a large, publicly traded company goes to jail, the firm generally keeps operating, whether it?s Martha Stewart or L. Dennis Kozlowski, the former chief executive officer of Tyco International Ltd. Hedge funds, which are smaller and almost always privately held, have proven to be more fragile. Their success depends on the investment skills of the founders and the trust placed in them by their investors.
?The practical reality is that if everyone else is going to pull out, then you have to pull out,? said Craig Slaughter, executive director of the West Virginia Investment Management Board, which had $50 million of its $12.5 billion in assets invested with Level Global. ?That?s the nature of the business.?
Of the four hedge funds that were 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 $1.32 billion, or 23 percent, of the Stamford, Connecticut-based firm?s assets. Loch Capital Management LLC hasn?t returned phone calls since the raid. A person working in the Boston-based fund?s office declined to comment earlier this week when approached by a reporter. No one at the firm has been charged.
The Odd Couple
?If there?s a fear that the people who are responsible for generating the returns are in big trouble, even if there?s no substance to those allegations, the uncertainty can drive investors away,? said Mitch Nichter, a partner at Paul, Hastings, Janofsky & Walker LLP, a New York-based law firm, whose clients include hedge funds.
Level Global clients had asked to withdraw about 20 percent of the fund?s assets at the end of March, the first opportunity to do so, a person familiar with the matter said last month.
The government investigation, while not crippling the firm, presented managers with ?significant challenges to maintaining our collective focus,? Ganek wrote in a Feb. 11 letter to clients, explaining the fund would close.
?So while we could continue to operate Level Global,? Ganek wrote, ?it would not be the business we promised our investors.?
High Society
Ganek, 47, started Level Global in 2003 with Anthony Chiasson, 37, an analyst whom he met at SAC Capital Advisors LP, Steven A. Cohen?s hedge fund in Stamford, Connecticut. At Level Global, where Ganek was the main portfolio manager and Chiasson the head of research, the two formed a sort of odd-couple team whose talents and demeanors complemented one another, said people who know them. Both men declined to be interviewed for this article through Andy Merrill, a spokesman for Level Global.
A New York native, Ganek grew up around money and leads the sort of high-society life befitting the front-man of a multi- billion hedge fund. His father, Howard Ganek, was a partner at money management firm Neuberger Berman and a well-known philanthropist. Last year, on his 80th birthday, the senior Ganek was honored for his support of the U.S. Memorial Holocaust Museum with a 600-person gala at Manhattan?s Pierre Hotel.
G&O Partners
The younger Ganek and his wife, Danielle, author of two comic novels that feature New York?s upper class, own multi- million-dollar homes, including a beachfront property in Southampton that they bought for $12.7 million, and a $19.1 million Park Avenue duplex where Steve Schwarzman, chief executive officer of private-equity firm Blackstone Group LP, also has an apartment. Ganek sits on the board of the Guggenheim Museum and, like his former boss Steve Cohen, has a large modern art collection that includes works by Diane Arbus, Richard Prince and Ed Ruscha.
Ganek met Danielle at Franklin & Marshall College in Lancaster, Pennsylvania, where he was captain of the squash team. The couple, who were married in 1990 and have three children, are often photographed with artists and socialites at parties and fundraisers in New York and the Hamptons on Long Island.
After graduating in 1985 with a bachelor?s degree in government, Ganek joined New York investment bank Donaldson, Lufkin & Jenrette, where he worked on the risk-arbitrage desk. After an eight-month stint at NatWest Bank U.S.A. in New York, he started hedge fund G&O Partners LP with Paul Orwicz, which they closed after only a few years.
Ganek?s greatest skill is ingratiating himself with people, doing favors and then collecting chits, says one former boss.
?Best Networker?
?Ganek is the best networker I?ve ever met,? according to Robert Chapman, founder of Chapman Capital LLC in Manhattan Beach, California, who said he fired Ganek from NatWest in 1993 after he lost money on a merger-arbitrage trade and then complained about his bonus.
Cohen offered Ganek a job in 1997, asking him to trade technology stocks. Two years later, Chiasson joined SAC as a tech analyst, working with Ganek. Ganek produced strong returns in 2000 in his $300 million portfolio, even as the technology bubble burst, and the two men used that track record to help raise about $500 million and open Level Global, according to a person familiar with the matter who asked not to be named because the information was private.
Chiasson has sought the limelight less than his business partner. A 1995 graduate of Babson College in Wellesley, Massachusetts, he started his career as an analyst at Salomon Brothers in New York and then moved to Credit Suisse First Boston before joining SAC.
?Under-the-Radar?
One of four children, Chiasson grew up in Portland, Maine, where his father was a self-employed businessman and his mother a librarian at Cheverus High School, the Jesuit preparatory school that he attended. He sits on the boards of both Babson and Cheverus.
?He?s low-key, under-the-radar,? said his 70-year-old mother, Lucille. ?He?s hardworking and dedicated. I would say to him ?Take a vacation, Anthony? and his idea of a fun weekend would be to come to home to Maine and attend Mass.?
Former colleagues and associates said Chiasson worked long hours, often including weekends, and had few interests outside of the office. They said he?s among the most knowledgeable analysts covering the technology industry.
He lives on Manhattan?s Upper East Side with his wife, Sandra, and son in a $4.25 million apartment he bought in 2006. The only other property he owns is his mother?s $400,000 house in Maine.
Expert Networks
Level Global posted an annualized return of 9 percent after fees from inception through the end of 2010, according to an investor letter obtained by Bloomberg News. That compares with a gain of 8.4 percent for the Dow Jones Credit Suisse Long/Short Equity Hedge Fund Index.
Level Global told potential investors its edge was having a rigorous process of choosing the best ideas of several portfolio managers, which then were included in a so-called center book managed by Ganek, a model similar to that employed at SAC. It also used about a half-dozen expert-network consulting firms, according to people familiar with the situation who asked not to be identified because the information was private.
Such firms, which provide research and connect industry experts with investors, have come under scrutiny amid the government investigation. Eight former employees of Primary Global Research LLC, an expert-network firm based in Mountain View, California, have been charged in the probe. Level Global was among the firm?s clients, according to a person familiar with the sitution.
Kinnucan Connection
Level Global until last year used the services of Broadband Research LLC, a one-man firm run by John Kinnucan in Portland, Oregon, who was subpoenaed in December by federal officials after he told clients that he refused an FBI request to wiretap them.
Kinnucan provided Chiasson with supply data such as the pricing of memory chips over a three-month period before Level Global terminated its contract in August, according to people with knowledge of the arrangement who asked not to be identified because the information is private.
Chiasson viewed himself as an integral part of the returns at both SAC and at Level Global.
?For over four years, my partner and I managed the global technology, media and telecom investing practice scouring the globe for investment opportunities,? he wrote about his years at SAC in a 2006 essay published in a Cheverus newsletter.
?Highly Confident?
The two men jointly signed letters they sent to clients, including the announcement in April 2010 that they had sold a minority stake to Goldman Sachs Group Inc.?s leveraged-buyout firm, according to an investor and a copy of the Goldman letter obtained by Bloomberg News.
The February letter to clients announcing the closure of the firm said that Level Global wasn?t a target of the U.S. government?s investigation nor had it been alleged to have engaged in any misconduct.
The letter also said that the firm had worked with outside legal advisers to perform an independent review of its electronic communications and technology-related trading records, and conduct interviews.
?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,? the letter said.
Only Ganek?s name appeared at the bottom of the letter.
--Editors: Steven Crabill, Larry Edelman
To contact the reporters on this story: Saijel Kishan in New York at skishan@bloomberg.net; Katherine Burton in New York at kburton@bloomberg.net
To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net
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