Diamondback Capital to close its doors as investors pull $520 million

Diamondback Capital Management, among the hedge funds raided by the FBI two years ago in the U.S. investigation of insider trading on Wall Street, is liquidating after an exodus of clients.

The hedge fund received requests from investors to withdraw about $520 million, or 26% of its assets, co-founders Richard Schimel and Lawrence Sapanski said Thursday in a client letter. Diamondback, which has 133 employees, plans to return the majority of clients' cash next month.

Diamondback's assets under management shrank to $1.5 billion from $5.8 billion in November 2010, when its offices were searched by the FBI. Three other hedge funds that were also raided at the time, including Level Global Investors, have shuttered. Former Diamondback portfolio manager Todd Newman is on trial in Manhattan on charges that he was part of a “criminal club” of friends and co-workers who made trades based on illegal tips.

“We especially appreciate your patience and support during the last two difficult years during which we reached closure of the government's investigation,” Messrs. Schimel and Sapanski said in the letter, a copy of which was obtained by Bloomberg. Steve Bruce, a spokesman for the firm, declined to comment beyond the letter.

Diamondback agreed earlier this year to pay more than $9 million to resolve a Securities and Exchange Commission lawsuit over trades made in 2008 and 2009 by Mr. Newman and Jesse Tortora, a former analyst who worked with Mr. Newman. Mr. Tortora has pleaded guilty to securities fraud and is cooperating with the government.

The office of Manhattan U.S. Attorney Preet Bharara agreed not to prosecute Diamondback for the actions of the Messrs. Newman and Tortora and said the co-founders weren't aware of their misconduct.

A third Diamondback employee, portfolio manager Anthony Scolaro, pleaded guilty to conspiracy and securities fraud in November 2010. Mr. Scolaro's cooperation with the government's insider-trading probe led to the raid on Diamondback.

Diamondback returned about 6% this year through Wednesday and an annualized 9.1% since its June 2005 inception, according to a person with knowledge of the returns who asked not to be named because the information is private.

The hedge fund has already started selling its investments, according to the letter.

Messrs. Schimel and Sapanski started Diamondback with Chad Loweth, who left the fund in 2010. They all previously worked at billionaire Steven A. Cohen's hedge fund, S.A.C. Capital Advisors. Mr. Schimel is Mr. Cohen's brother-in-law.

Level Global, founded by former S.A.C. employees David Ganek and Anthony Chiasson, shuttered in February last year. Mr. Chiasson is on trial with Mr. Newman. Regarding the two other hedge funds that were raided by the FBI, Barai Capital Management, which was run by Samir Barai in New York, also closed last year while Loch Capital Management told clients at the end of 2010 that it was liquidating.