NEW YORK (Reuters) – U.S. securities regulators are closing a long-running investigation into allegations that two well-known hedge funds conspired to spread negative information about Toronto insurer Fairfax Financial, two people familiar with the inquiry said.

The Securities and Exchange Commission recently sent letters to lawyers for hedge fund managers Steven Cohen and James Chanos, advising them that the agency was terminating an investigation that began in fall 2008, two people familiar with the matter said.

The sources, who didn't want to be identified because the SEC hasn't made the letters public, said the termination letters were sent out a little over a month ago.

It is not unusual for securities regulators to notify parties in an investigation when an investigation is likely to conclude with no enforcement action – especially if the probe has gone on for a long time.

A spokesman for Cohen's $16 billion fund SAC Capital Advisors declined to comment. A lawyer for Chanos' $6 billion Kynikos Associates declined to comment as well. An SEC spokesman declined to comment.

The SEC investigation springs from a civil lawsuit Fairfax filed in 2006 in New Jersey state court, alleging SAC Capital, Kynikos and other traders took part in a so-called short conspiracy. The lawsuit, which is still ongoing, alleges the hedge funds bet against Fairfax shares and then spread negative stories about the company in hopes of driving down the stock price.

In early 2009, the SEC stepped up its investigation when it sent a subpoena to Fairfax's lawyers seeking copies of all emails and trading reports the hedge funds had turned over in the course of the civil litigation.

Last year, Fairfax's lawyer began taking depositions in the civil suit, including lengthy depositions of Chanos and Cohen. To date, only portions of those depositions have been made public.

Fairfax, speaking through its lawyers, declined to comment on the SEC action.

For Cohen, the SEC decision to end its investigation is a second legal win in the Fairfax fracas. In September, New Jersey Superior Court judge Stephan Hansbury dismissed Fairfax's claims that SAC Capital had participated in a short conspiracy.

The judge has yet to rule on motions to dismiss filed by Kynikos and other defendants.

Reuters, along with Bloomberg News, are intervenors in the civil lawsuit, seeking access to millions of pages of documents and depositions that have been sealed in the case. Reuters, for instance, is opposing a motion to keep sealed portions of Cohen's lengthy deposition in the dispute.

(Reported by Matthew Goldstein; edited by Jennifer Ablan and Bernard Orr)

NEW YORK (Reuters) – U.S. securities regulators are closing a long-running investigation into allegations that two well-known hedge funds conspired to spread negative information about Toronto insurer Fairfax Financial, two people familiar with the inquiry said.

The Securities and Exchange Commission recently sent letters to lawyers for hedge fund managers Steven Cohen and James Chanos, advising them that the agency was terminating an investigation that began in fall 2008, two people familiar with the matter said.

The sources, who didn't want to be identified because the SEC hasn't made the letters public, said the termination letters were sent out a little over a month ago.

It is not unusual for securities regulators to notify parties in an investigation when an investigation is likely to conclude with no enforcement action – especially if the probe has gone on for a long time.

A spokesman for Cohen's $16 billion fund SAC Capital Advisors declined to comment. A lawyer for Chanos' $6 billion Kynikos Associates declined to comment as well. An SEC spokesman declined to comment.

The SEC investigation springs from a civil lawsuit Fairfax filed in 2006 in New Jersey state court, alleging SAC Capital, Kynikos and other traders took part in a so-called short conspiracy. The lawsuit, which is still ongoing, alleges the hedge funds bet against Fairfax shares and then spread negative stories about the company in hopes of driving down the stock price.

In early 2009, the SEC stepped up its investigation when it sent a subpoena to Fairfax's lawyers seeking copies of all emails and trading reports the hedge funds had turned over in the course of the civil litigation.

Last year, Fairfax's lawyer began taking depositions in the civil suit, including lengthy depositions of Chanos and Cohen. To date, only portions of those depositions have been made public.

Fairfax, speaking through its lawyers, declined to comment on the SEC action.

For Cohen, the SEC decision to end its investigation is a second legal win in the Fairfax fracas. In September, New Jersey Superior Court judge Stephan Hansbury dismissed Fairfax's claims that SAC Capital had participated in a short conspiracy.

The judge has yet to rule on motions to dismiss filed by Kynikos and other defendants.

Reuters, along with Bloomberg News, are intervenors in the civil lawsuit, seeking access to millions of pages of documents and depositions that have been sealed in the case. Reuters, for instance, is opposing a motion to keep sealed portions of Cohen's lengthy deposition in the dispute.

(Reported by Matthew Goldstein; edited by Jennifer Ablan and Bernard Orr)

WASHINGTON – The largest hedge funds and private equity firms must report financial information to the government under a rule adopted Wednesday. But the Securities and Exchange Commission backed off broader reporting requirements for the funds after it drew heavy objections from the industry.

The final rule applies to hedge funds with $1.5 billion or more in assets and private equity firms with $2 billion or more and requires only annual reporting by private equity firms. In January, the SEC proposed reporting for firms with $1 billion or more in assets and would have made the reports quarterly for both large hedge funds and private equity funds.

The new reporting is mandated by the financial overhaul law passed last year. Federal regulators will use the data — which will not be made public — to monitor the funds’ risks to the financial system.

Hedge funds are investment pools that use complex trades to seek big returns. They command trillions of dollars in assets and account for about 20 percent of all stock trading.

Private equity funds focus on buying and reselling companies. During the 2008 financial crisis, some hedge funds suffered huge losses and that contributed to the strain on financial markets, regulators said.

In final form, the rule also gives funds more time to file the reports than SEC initially proposed.

Hedge funds must make the reports within 60 days of the end of each quarter, and private equity funds must report within 120 days of the end of each fiscal year.

SEC Chairman Mary Schapiro said the changes made in the final rule “address issues” raised by those who submitted comment letters objecting to the proposal, while preserving the data’s utility.

Schapiro said fund leaders objected most strenuously to the frequency and deadlines for the reports.

“We want the information that will be reported to regulators … to be useful,” she said before the vote. “It will not be useful if it is rushed or incomplete.”

Rep. Darrell Issa, R-Calif., chairman of the House Oversight and Government Reform Committee, told Schapiro in a letter last month that he was concerned the requirements in the proposed rule “will impose a heavy compliance burden (on the funds) that will harm economic growth, reduce investment opportunities” and crimp the flow of money through the financial markets.

The funds will submit the reports to the SEC and the Commodity Futures Trading Commission, which is expected to adopt the rule in a week or so.

The information will be used by the Financial Stability Oversight Council, a body of regulators created by the 2010 overhaul law to keep watch over the financial system.

WASHINGTON (Reuters) – Securities regulators are negotiating to raise the threshold that would trigger extensive reporting requirements for advisers to large hedge funds and other private funds, according to people familiar with the deliberations.

The final rule, due for a vote on Wednesday by the Securities and Exchange Commission, could provide some relief for advisers to larger hedge funds, liquidity funds and private equity funds, these sources said.

In addition to possibly raising the dollar threshold so that fewer advisers will be captured by the expansive reporting rules, the SEC is also planning to grant some relief for advisers to large private equity funds by only requiring them to file reports with the SEC annually, instead of quarterly.

The sources spoke anonymously because the final rule is not yet public and negotiations were continuing Tuesday on the details.

While advisers to large hedge funds will still be required to submit more extensive information to regulators about things such as their funds' exposures to various asset classes, the SEC's final rule will clarify that hedge fund advisers will not be forced to hand over detailed position-level data, one of the sources said.

(Reporting by Sarah N. Lynch; Editing by Tim Dobbyn)

BOSTON (Reuters) – August was a rotten month for stocks and it wasn't much kinder to some of the world's most successful hedge fund managers, early returns show.

Even some of the industry's titans, including Steven Cohen, Dan Loeb and David Einhorn, couldn't escape the global sell-off at the start of the month and finished August in the red.

Cohen's SAC Capital Advisors lost about 3 percent, Loeb's Third Point Offshore Fund fell 2.8 percent and Einhorn's Greenlight dipped 1.4 percent, people familiar with their returns said on Thursday.

While Cohen and Loeb remain in the black for the year — SAC is up about 7 percent while Third Point is 3.9 percent higher — many others haven't been so successful. Einhorn, who made headlines this summer with a now collapsed deal to buy a stake in the New York Mets baseball team, is off nearly 5 percent.

Whitney Tilson's T2 Partners LLC told investors that the fund declined 13.7 percent last month, leaving it off 22.1 percent for the year.

"On the long side, our portfolio got clobbered across the board despite generally good company-specific news regarding our major holdings," Tilson said in a letter.

What hurt Tilson likely also led to more red ink at his college friend William Ackman's Pershing Square Capital Management. Ackman was already off double digits earlier in the month. So when Tilson said that losses in Citigroup, General Growth Properties, and J.C. Penney swamped his portfolio, they likely inflicted similar damage on Ackman, who also owned shares of the companies.

But the industry's most prominent loser is still John Paulson, the billionaire investor who misjudged the pace of economic recovery and was badly battered in financial stocks. His flagship Advantage Funds are still off between 25 percent and 35 percent for the year, one investor said.

For August, which began with a dramatic market sell-off and ended with tropical storm Irene drenching east coast hedge fund hubs in New York and Connecticut, hedge funds, on average, lost 5.85 percent, Hedge Fund Research data shows. That compares with 4.4 percent drop suffered by the Dow industrials, which made for the worst August in a decade, and the 5.61 percent drop registered by the S&P 500.

Hedge fund returns are often closely guarded secrets, so any information on how some of the top names are performing is closely monitored. Performance trackers like Hedge Fund Research are expected to release general statistics next week.

While the losers may be stealing the limelight, there are also some prominent winners who have generally positioned their portfolios for a drop in the markets.

The Renaissance Institutional Equities Fund, founded by mathematician turned hedge fund manager James Simons, returned to form earlier this year and gained 5.4 percent in August, leaving it up 25.6 percent for the year, an investor said. The Renaissance Institutional Futures Fund gained 6.6 percent in August and is up 9.16 percent for the year, the same person added.

Kenneth Griffin's Kensington/Wellington fund at Citadel also ended the month with gain, as it climbed 1 percent to be up 15 percent for the year, an investor said. Griffin's Global Equities fund gained 1.6 percent in August and is up 14 percent for the year.

(Editing by Steve Orlofsky)

LONDON (Reuters) – Hedge funds run by sophisticated computer programs are profiting from large falls in stock markets and a rocketing gold price this month, even as funds managed by human beings struggle to cope with high market volatility.

Insiders say so-called managed futures funds, which try to latch onto market trends, are making money from declining bond yields and falling equities, as investors seek safe havens amid the eurozone debt crisis and after the U.S.'s credit rating downgrade.

These "black box" funds are up 4.2 percent so far this month, according to Hedge Fund Research's HFRX index, while the average hedge fund is down 4.0 percent and managers betting on rising and falling stock prices have lost a hefty 7.3 percent on average.

Man Group (EMG.L) has seen its flagship $23.9 billion AHL fund rise 4.3 percent — making a profit of roughly $1 billion — over the week to Monday, a regulatory filing from the company showed.

The gains take AHL to just 0.3 percent on average away from the level above which it earns performance fees.

Shares in Man — the world's biggest listed hedge fund manager — closed up 10.2 percent at 216.1 pence, while the FTSE 100 index closed up 1.5 percent.

"These are the environments in which we're expected to perform," said AHL portfolio manager Harry Skaliotis, who said AHL is long bonds, gold and base metals, and short equities.

In currencies it is short the dollar and long sterling, the yen and the Australian dollar.

"When you get real panic and concerns in the market you tend to see, across all asset classes, people … running away from risky assets," Skaliotis said.

British blue chip index the FTSE 100 is down more than 10 percent so far this month on fears of an economic downturn and further problems in the banking sector, although Wednesday's rally may have eroded some managed futures funds' gains.

Meanwhile, Winton Capital, one of Europe's biggest hedge fund managers with $22.4 billion in assets, has seen its flagship fund gain 2.2 percent so far this month, taking year-to-date gains to 7 percent, according to a source familiar with the matter.

The fund, which like AHL is running a low level of risk compared with the rest of the sector, has also profited from shifting to a bet on falling stock prices in recent weeks, the source said.

It has also made money from gold, which on Tuesday rose above $1,900 an ounce, though it fell back below $1,800 on Wednesday.

"Managed future funds have profited from positions in precious metals, oil and agriculture," Gemma Godfrey, head of research at Credo Capital, told Reuters.

"In a volatile environment the ability to move quickly with focus on highly liquid investments, and profit when markets fall as well as rally, has proved useful. These funds trade to profit from macro events, and we've had plenty to rock markets recently," Godfrey said.

Elsewhere in the sector, SMN Diversified Futures fund, which made 58.5 percent in 2008's market chaos, is up 13.7 percent so far this month, according to its website.

However, not all computer funds have profited. Bluecrest's $10.15 billion Bluetrend fund is down 1.7 percent so far this month, said a source close to the company, although it is still up 4.2 percent this year.

(Reporting by Laurence Fletcher)

BOSTON (Reuters) – Billionaire investor George Soros, whose stock-picking career has spanned nearly four decades, said he will manage money only for himself and his family as new regulations threaten to crimp the hedge fund industry he made famous.

The octogenarian fund manager, known as much for earning $1 billion on a nervy currency bet as for giving away millions to support liberal causes, will return roughly $1 billion to outside investors most likely by the end of the year and turn Soros Fund Management into a family office. The sum represents only a small portion of the $25 billion he oversees.

Keith Anderson, who has been Soros’ chief investment officer since 2008, will leave the firm.

Since launching the Quantum Fund nearly 40 years ago, Soros, who emigrated to the United States from Hungary, created one of most envied records in the industry, returning about 20 percent a year. But recently volatile market conditions have taken their toll on the fund as it lost 6 percent in the first half of 2011 and gained only 2.5 percent last year.

In a letter to investors, Soros’ two sons, the fund’s deputy chairmen, cited impending industry regulation as a reason for returning the money now.

Bloomberg first reported the news.

EXEMPTIONS NO MORE

Under the new Dodd-Frank Act, hedge funds will be forced to register with financial regulators, giving the Securities and Exchange Commission fresh insight into exactly how these generally secretive portfolios make money. But family offices are treated more leniently under the new regulations.

Ever since their father reorganized the Quantum fund in 2000 after heavy losses, the firm has effectively been operating as a family office, relying on various exemptions to avoid registration, the Soros brothers wrote.

Now that many loopholes have been closed, it made more sense to return outsiders’ money instead of going through the expensive and time consuming process of registration, people familiar with Soros’ thinking said.

“An unfortunate consequence of these new circumstances is that we will no longer be able to manage assets for anyone other than a family client as defined under the regulations,” Jonathan and Robert Soros said.

Soros joins a growing list of fund managers who have recently revamped their businesses in the face of fresh regulation. Stanley Druckenmiller, Soros’ long-time deputy who helped engineer the firm’s winning bet against the British pound in 1992, returned money as did Chris Shumway, who was mentored by another industry great, Julian Robertson. Earlier this year Carl Icahn did the same.

For some outsiders the trend is raising some red flags.

“If the top money managers are closing shop because of overly onerous regulations, then this will ultimately be to the detriment of our institutional investors,” said Jim Liew, who teaches finance at NYU’s Stern School of Business. “In this environment, we actually need more hedge fund activity: hiring people, raising capital, allocating money, and ultimately stimulating our economy,” he added.

MORE BARK THAN BITE

Soros’ decision to return money sounds dramatic but the move is expected to be more symbolic than disruptive. The firm is not expected to shrink in size from its roughly 100 employees and George Soros is expected to remain as active in managing money as he always has been.

Soros, and Anderson, recently unwound a huge bet on gold, selling off almost $800 million of exchange-traded funds that hold gold during the first quarter, according to a recent SEC filing. Soros also slashed stakes in gold mining stocks like Kinross Gold and Novagold Holdings.

Indeed even Carl Icahn, who returned outsiders’ money, has not retreated from the public stage and recently made a prominent play for bleach maker Clorox. And Julian Robertson, who long mentored some of the industry’s next generation of stars, is now letting outsiders invest along side him again.

George Soros’ particular focus on philanthropy may have played a hand in his decision to manage only his own money as his support for liberal causes and candidates have increasingly made him into a lightning rod for conservatives.

Last year, Soros told Reuters “I will effectively give away half my income as I earn it and the other half I will give away on my death.”

Outsiders interpret this to mean he wants to make more and now it may be easier to act on his own. “The trades that people will have to conduct in the future in order to make money may not be very politically correct — you may have to short the dollar and do other things that are considered unpatriotic– and making those bets may be easier without having limited partners calling up to complain,” said Charles Gradante, co-founder of Hennessee Group which invests with hedge funds but has no money with Soros right now.

(Additional reporting by Aaron Pressman in Boston and Michelle Nichols in New York, editing by Gerald E. McCormick, Dave Zimmerman)

(Reuters) – Citigroup Inc (C.N) shut down a $400 million hedge fund that used the bank’s money and mathematical models to bet on stocks, in the wake of new regulations aimed at stopping proprietary trading, Bloomberg reported, citing a person familiar with the matter.

Citi, the third-largest U.S. bank by assets, closed the Quantitative Strategies fund after it named fund manager Shakil Ahmed as the head of electronic market-making in April, the news agency said.

Banks might have to spin off their trading platforms once the Volcker Rule — which prohibits banks from trading for their own profit in securities, derivatives and other financial instruments or investing in hedge funds — comes into effect.

Citigroup did not immediately respond to requests seeking comment, outside of normal U.S. business hours.

(Reporting by Rachel Chitra in Bangalore)

NEW YORK – A former Wall Street titan was convicted Wednesday of making a fortune by coaxing a crew of corporate tipsters into giving him an illegal edge on blockbuster trades in technology and other stocks — what prosecutors called the largest insider trading case ever involving hedge funds.

Raj Rajaratnam was convicted of five conspiracy counts and nine securities fraud charges at the closely watched trial in federal court in Manhattan. The jury had deliberated since April 25, and at one point was forced to start over again when one juror dropped out due to illness.

Prosecutors had alleged the 53-year-old Rajaratnam made profits and avoided losses totaling more than $60 million from illegal tips. His Galleon Group funds, they said, became a multibillion-dollar success at the expense of ordinary stock investors who didn’t have advance notice of the earnings of public companies and of mergers and acquisitions.

On Wednesday, Rajaratnam sat at the defense table, a rarity for him at the trial, and stayed motionless as the verdict was read. He will remain free on bail, though now with electronic monitoring, at least until his July 29 sentencing.

Prosecutors said Rajaratnam faces a maximum term of more than 19 years in prison.

U.S. Attorney Preet Bharara said the verdict sends a message that white collar laws apply to everyone, “no matter how much money you have.”

The defendant “was among the best and the brightest, one of the most educated, successful and privileged professionals in the country,” Bharara said in a statement. “Yet, like so many others, he let greed and corruption cause his undoing.”

Outside court, with Rajaratnam at his side, defense attorney John Dowd said there will be an appeal filed with the 2nd U.S. Circuit Court of Appeals. Of the 37 trades that the government sought to prosecute, he added, only 14 made it to trial.

“The score is 23-14, in favor of the defense,” he said. “We’ll see you in the 2nd Circuit.”

The verdict came after seven weeks of testimony showcasing wiretaps of Rajaratnam wheeling and dealing behind the scenes with corrupt executives and consultants. Some of the people on the other end of the line pleaded guilty and agreed to take the witness stand against the Sri Lanka-born defendant.

Authorities said the 45 tapes used in the case represented the most extensive use to date of wiretaps — common in organized crimes and drug cases — in a white-collar case.

The defense had fought hard in pretrial hearings to keep the avalanche of audio evidence out of the trial by arguing the FBI obtained it with a faulty warrant. Once a judge allowed them in, prosecutors put the recordings to maximum use by repeatedly playing them for jurors.

“You heard the defendant commit his crimes time and time again in his own words,” Assistant U.S. Attorney Reed Brodsky said in closing arguments.

“The tapes show he didn’t believe the rules applied to him,” the prosecutor added. “Cheating became part of his business model.”

The wiretaps appeared to play prominently in the jurors’ deliberations: They asked to return to the courtroom countless times so they could listen to them again.

U.S. District Judge Richard Holwell told jurors not to talk about the deliberations.

After they were dismissed, Assistant U.S. Attorney Jonathan Streeter immediately asked the judge to jail Rajaratnam, arguing that his overseas bank accounts and properties gave him the means to flee the country. The prospect of a lengthy prison term also gave him “tremendous incentive” to go underground, Streeter said.

But the judge ruled that Rajaratnam could remain free on $100 million bail as long as he was placed under house arrest at his Manhattan home. When the courtroom emptied, the defendant paced around and looked somber as he waited to meet with his lawyers.

The defense had argued that the tapes revealed nothing more than that Rajaratnam was doing his duty by asking questions about information already circulating in the “real world” of high finance.

“That happens every day on Wall Street,” Dowd told the jury. “There’s nothing wrong with it.”

Dowd headed a team of attorneys who crowded around the defense table each day. The defendant took an uncustomary position on a bench behind them and listened along with jurors as his voice filled the courtroom.

In one July 29, 2008, call, Rajaratnam could be heard grilling former Goldman Sachs board member Rajat Gupta about whether the board had discussed acquiring a commercial bank or an insurance company.

“Have you heard anything along that line?” Rajaratnam asked Gupta.

“Yeah,” Gupta responded. “This was a big discussion at the board meeting.”

Prosecutors sought to maximize the impact of the Gupta tape by calling Goldman Sach’s chairman Lloyd Blankfein to testify that the phone call violated the investment bank’s confidentiality policies. Gupta, who has not been charged, has denied any wrongdoing.

The government also has played tapes of Rajaratnam it said proved he was trading secrets and orchestrating cover-ups with fellow hedge fund manager Danielle Chiesi, who has pleaded guilty in the case.

“I mean I think this stock could go up $10 you know? But we got to keep this radio silence,” Rajaratnam said in one tape.

“Oh please. That is my pleasure,” Chiesi responded.

“Not even to your little boyfriends, you know?”

“No, believe me, I don’t have friends,” she replied.

Rajaratnam advised Chiesi to buy 1 million shares of tech stock on an inside tip, then sell 500,000 of those shares — a tactic prosecutors say was used to throw regulators off the trail. In another instance, about 30 minutes of calls with an Intel tipster scored Rajaratnam a $2 million windfall on the computer chip-maker’s stock, prosecutors said.

Former financial consultant Anil Kumar testified that he and Rajaratnam — his former classmate at the University of Pennsylvania’s prestigious Wharton School — broke the law by speaking regularly about the negotiations over the acquisition of ATI Technologies Inc. by Kumar’s client, Advanced Micro Devices Inc., before the deal was announced.

“I told him that this was `red hot’ and shouldn’t be discussed,” Kumar said. Later, he said he cautioned the defendant, “This is going to be a complete shock to the industry … so treat this with the strictest of confidence.”

Prosecutors say Rajaratnam raked in $20 million by trading on his advance notice of the ATI-AMD deal. Afterward, he called Kumar at home and said, “You’re a star,” Kumar told the jury in federal court in Manhattan.

When Rajaratnam later informed Kumar that he would be rewarded with a $1 million kickback, “I almost fell off my chair,” the witness said.

The Galleon probe has resulted in more than two dozen arrests and 21 guilty pleas. It also has led to a second investigation aimed at consultants in the securities industry who pass off inside information as the product of legitimate research.

Only Rajaratnam has gone to trial and relived conversations that the insiders never suspected were being monitored. On one tape, Rajaratnam sounded sheepish when one particularly effusive tipster praised him for being a star in the hedge fund universe.

“The myth,” Rajaratnam said, “is larger than the reality.”

___

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