Insider trading involving hedge funds and their expert advisers is the focus of a probe by the U.S. Attorneys Office for the Southern District of New York, the FBI and the SEC, according to multiple media sources. Spokesmen for the USAO and the SEC have declined comment. Nevertheless, information is circulating about a wide spread insider trading investigation that may result in the filing of charges by year end. The precise source of the information is unclear.

What is clear is that the FBI is continuing to use “blue collar” tactics in securities cases, conducting raids at three hedge funds on Monday. Search warrants were used to seize business records and other documents. The funds raided are Level Global Investors LP, Diamondback Capital Management LLC and Loch Capital Management. Level Global and Diamondback Capital were founded by individuals who were formerly affiliated with SAC Capital. Level is partially owned by a leverage-buyout firm run by Goldman Sachs Group, Inc.

What is clear is that no charges have been brought against Level Global, Diamondback Capital and Loch Capital. No charges have been filed against any employee or affiliate of any of these funds. Two of the funds have issued press releases stating that they are cooperating with the government.

What is clear is that hedge funds, like other professional service firms, rely for their continued operations on their good reputations. While these funds may have billions of dollars under management, the key to their current and future operations is their good name. If that reputation is tarnished, the billions of dollars under management can become zero in short order. Ask one time Wall Street power house Drexel. Ask one time accounting giant Arthur Anderson. Both charged. Both out of business. In this context, the power to accuse is the power to terminate. For hedge funds such as those in the raid, the suggestion of illegality in their core business of trading securities can translate to the beginning of the end.

What is not clear is the reason the government is using blue collar tactics like search warrants rather grand jury subpoenas. A search warrant is high profile. It is invasive. It generates publicity as is evident from the news reports about the three executed on the premises of these hedge funds. A grand jury subpoena is not high profile. Grand jury proceedings are secret to protect those involved. A grand jury subpoena does not have the invasive impact of dozens of FBI agents seizing a business premises and going through all of the records to find what they want. Both can secure the information the government wants.

In the end, one or more of the raided firms may be charged with insider trading. One or more of the individuals employed at these firms may be charged with a federal crime. Perhaps not. Perhaps no one will be charged. Either way, the waves of negative publicity will, for many investors and potential clients of these firms forever tar their reputations. For many FBI agents raiding the business like a mob warehouse is the equivalent of an accusation of wrong doing tending toward a conviction by a jury.

It is beyond dispute that the USAO, the FBI and the SEC should effectively police the markets to prohibit insider trading. Equally fundamental is the fact that in doing so they should use methods which are effective, but respect the rights of those involved. This means the techniques should be the least intrusive necessary and avoid injury. FBI raids against securities traders, rather than grand jury subpoenas raise fundamental questions about the operations of law enforcement and its ability to protect the rights of all.