Founders of Shuttered $6 Billion Hedge Fund Planning a Comeback

By Anonymous

Richard Schimel and Lawrence Sapanski ran a $6 billion hedge fund that shut down earlier this decade following an insider-trading investigation. Now they are plotting a return to the industry.

Messrs. Schimel and Sapanski are planning to launch a new hedge fund and raise at least $500 million from clients, people familiar with the matter said.

The firm, which doesn’t yet have a name, is in the early stages of planning, and the plans could change.

The new firm will focus on stocks and will be based in New York. Private-equity giant Blackstone Group has discussed a potential investment, according to some of these people. Messrs. Schimel and Sapanski declined to comment.

Messrs. Schimel and Sapanski previously founded Diamondback Capital Management in 2005.

That firm closed after a portfolio manager was accused of insider trading and the FBI raided Diamondback during a wide-ranging insider-trading probe.

Diamondback wasn’t accused of wrongdoing and entered into a nonprosecution agreement with the government, agreeing to pay about $9 million in disgorgement and penalties.

In 2016, the government vacated the case against Diamondback, and agreed to refund the firm the roughly $9 million it had paid.

Messrs. Schimel and Sapanski weren’t accused of any wrongdoing.

The new launch is one of several from well-known hedge-fund figures, including former Millennium Management executives Michael Gelband’s and Hyung Soo Lee’s $8 billion ExodusPoint and former Viking Global Chief Investment Officer Daniel Sundheim’s $4 billion D1 Capital. Jacob Gottlieb, who shut Visium Asset Management in 2016 amid an insider-trading and mismarking scandal, also is looking to raise money again.

This isn’t the first return to the industry for Messrs. Sapanski and Schimel since winding down Diamondback in 2013 and returning money to clients.

After Diamondback’s end, Mr. Schimel launched a new fund called Sterling Ridge Capital Management. Sterling oversaw about $425 million at its peak and closed in 2016, a person close to the matter said. Mr. Schimel also headed a stock-picking unit for Ken Griffin’s Citadel LLC and left that post earlier this year.

Mr. Sapanski in 2013 also launched his own fund called Scoria Capital. It shut about four years later and managed about $500 million at its peak, according to the person close to the matter.

Messrs. Sapanski and Schimel met each other in 2000 when they worked for billionaire Steven Cohen’s SAC Capital Advisors LP. SAC pleaded guilty to criminal insider-trading charges in 2013. Mr. Cohen was never criminally charged.

The duo did well in the immediate aftermath of the latest financial crisis. Diamondback’s flagship fund gained about 23% in 2009, its best year of performance, according to a document reviewed by The Wall Street Journal. The fund returned 7% the following year.

In 2010, the FBI raided Diamondback and other funds amid a government crackdown on insider trading. The flagship fund lost 3% in 2011.

In 2012 a portfolio manager, Todd Newman, was convicted of insider-trading in technology stocks. The firm’s flagship fund gained about 7.7% in 2012 through October but Diamondback announced it would shut down after clients asked to redeem about one-quarter of assets from the fund. It agreed to its nonprosecution agreement that same year and agreed to pay $9 million.

Diamondback returned money to all clients in 2013, according to the person close to the matter.

Mr. Newman’s conviction was overturned in 2014 by an appeals court. In 2015, the Supreme Court declined to review the case. U.S. officials agreed to refund Diamondback’s $9 million in 2016.

Write to Rachael Levy at [email protected]