B.J. Kang may be the most feared man on Wall Street.

When Bernie Madoff, who engineered history's biggest Ponzi scheme, was arrested, FBI Special Agent Kang was right at his side. And less than a year later, there was Kang again, in a perp walk, shuffling alongside a handcuffed Raj Rajaratnam, the former hedge fund star at Galleon accused of earning millions off illegally obtained stock tips.

The question on the minds of investors, managers and lawyers inside and outside the hedge fund industry today is, who's next?

Of course, no one knows for sure. But court documents and interviews with many industry sources familiar with the case show that agent Kang may be focusing in on Steven A. Cohen and his $12.9 billion SAC Capital Advisors, L.P.

Reuters has learned that Kang investigated allegations of trading irregularities at SAC two years ago, though the inquiry concluded with no charges being filed against the firm.

A member of the Federal Bureau of Investigation's securities task force, Kang is heading up the two-year-old insider trading inquiry that has collared Rajaratnam and led to criminal charges being filed against 19 others by federal prosecutors in Manhattan.

It was Kang, too, who signed most of the court applications seeking permission to place wiretaps on phones used by Rajaratnam and several other defendants, said people familiar with the investigation. He also conducted many of the initial interviews with the key cooperating witnesses in the still unfolding case, according to court filings and people close to the probe.

The Galleon investigation has potentially produced a new lead for Kang to pursue against SAC, one of the world's largest and most successful hedge funds. A cooperating witness, Richard Choo-Beng Lee, is expected to provide prosecutors with alleged evidence of insider trading he may have committed between 1999 and 2009 -- a period that includes a five-year stint at SAC, according to the court documents.

For years, Cohen's aggressive, quick-paced trading style and high double-digit returns have earned him both admiration and envy in investing circles.

SAC's flagship onshore fund, S.A.C. Capital Management, L.P., which was launched in 1992, has returned 30 percent net per annum through October 31, 2009, according to marketing material.

Everyone wants to knock down Steve Cohen, but he is not a multi-billionaire for nothing. They are having a fantastic year, said Bradley Alford, founder of Alpha Capital Management, which invests with Cohen.

But will Kang & Co. spoil the party?

CHANGE AGENT

Just like Cohen, Kang avoids the limelight and refused to be interviewed for this story. The FBI wouldn't even disclose biographical information about him, including his age.

Known simply as B.J. to lawyers and others who have worked with him, Kang, who is Korean-American, once joked that he prefers using initials because his full name is too hard for most people to pronounce. With his accounting background he is able to delve deeply into the minutiae of financial crimes.

But Kang's toughest challenge may lie ahead of him. Lawyers, hedge fund traders and others with knowledge of the ongoing investigation say the agent and federal prosecutors are now focused on a number of former SAC employees whose names have cropped up during the Galleon phase of the inquiry and who also may have engaged in insider trading.

Lee, one of five cooperating witnesses in the Galleon case, is prepared to tell authorities about any insider trading he may have engaged in while working as a technology analyst at SAC from 1999 to 2004, according to a court filing. Most legal experts say prosecutors will have a hard time using any evidence Lee may provide given that it is relatively old.

The government's interest in SAC and Cohen shouldn't surprise anyone. Cohen's firm stands at the pinnacle of the $1.5 trillion hedge fund industry. Critics have often complained that SAC gets better access to information from Wall Street firms because of its sheer size and the hundreds of millions in commissions it pays out.

Since Cohen founded SAC in 1992, it has posted losses just once -- during last year's financial crisis, when the average hedge fund lost 19 percent and Cohen's portfolio was off 27.56 percent.

The firm exudes success. Pricey paintings adorn SAC's headquarters in Stamford, Connecticut, where Cohen sits most days at the center of a giant trading floor surrounded by hundreds of employees. Investors must commit at least $10 million and they pay Cohen more than most rival hedge fund managers -- a 3 percent annual management fee plus as much as 50 percent of the gains he and his traders deliver.

SAC's top traders typically take home lavish compensation packages that stand out even by Wall Street standards.

When you work for him you are paid to perform, Alpha Capital's Alford said. And if you don't cut it, it is like in major league sports, you get sent back to the minor leagues, Alford said, adding SAC has had only one down year.

FIRST RUN-IN

B.J. Kang was two years on the job when he first encountered Cohen's hedge fund. In 2006, the agent was part of the prosecution team looking into alleged accounting irregularities at Canadian insurer Fairfax Financial Holdings Ltd , say people familiar with the situation.

In the midst of that government inquiry, Fairfax, in July 2006, sued SAC, James Chanos' Kynikos Associates and other hedge funds, claiming they had engaged in a conspiracy to drive down the price of the insurer's shares because they were shorting -- or betting on a decline in Fairfax's stock price.

Soon after, for reasons that remain unclear, the federal government's interest in pursuing a Fairfax accounting case began to fade. Indeed, this summer Fairfax said it had received notification from the Securities and Exchange Commission that a parallel investigation it had been pursuing was completed and regulators had no plans to recommend any enforcement action.

In 2007, Kang was assigned to work on a previously undisclosed investigation involving alleged trading irregularities at Cohen's hedge fund, said people familiar with that matter. That inquiry, opened by federal prosecutors in Brooklyn, New York, concluded with authorities declining to take action against Cohen or anyone else associated with SAC.

But before the probe by Brooklyn prosecutors was closed, Kang interviewed former SAC analyst Andrew Tong, who had already become a tabloid sensation -- not to mention an embarrassment to SAC.

In a lawsuit earlier that year Tong had charged that his male supervisor, Ping Jiang, then a top SAC trader, forced him to perform oral sex on him before completing a trade, according to people familiar with the investigation and court papers. Tong also alleged Jiang ordered him to take female hormones to turn him into the ideal analyst/trader, combining both male and female characteristics, the court documents note.

The case file was quickly sealed by the trial judge, making it difficult for reporters to get a glimpse at all the salacious allegations.

After the litigation ended last year, without any money exchanging hands, the court filings were quietly unsealed. A close review of the documents, in addition to conversations with people familiar with the investigation, reveal that what most interested Kang wasn't the accusations of coerced gay sex, but Tong's allegations of manipulative trading at SAC.

In early 2006, according to the court papers, Jiang directed Tong and at least two other SAC employees to take part in a manipulative trading scheme involving shares of China Yuchai International Ltd. , a Chinese-based diesel engine manufacturing company. The court papers suggest the hedge fund took a short position in shares of China Yuchai; betting the stock would fall in price. The papers say Tong and others then began manufacturing false negative analytical reports about CYD to facilitate this manipulation.

The strategy didn't work and SAC took a $3 million hit, which Tong claims Jiang ultimately blamed on him. Tong alleged that Jiang used the loss as a justification to fire him and that the real reason for his dismissal was his decision to stop taking the female hormones and engaging in sexual conduct with Mr. Jiang, the documents say.

A lawyer for Jiang didn't return several phone calls. Tong's lawyer, Parisis Filippatos, said his client could not be reached for comment. A spokesman for the prosecutors' office in Brooklyn declined to comment.

It's not clear why the investigation in Brooklyn ended without any action being taken. Nor is it clear what precipitated the inquiry. A related investigation by the Equal Employment Opportunity Commission into Tong's sexual harassment allegation was closed in April 2008 with the agency taking no action against the hedge fund or Tong's former boss.

But the court filings in the Tong lawsuit hint at the difficulties Kang and others in law enforcement may face in pursuing a case against SAC if any wrongdoing is ever uncovered. In one filing, Tong recalls Jiang telling him that SAC places a premium on secrecy and guarding its trading strategies -- even from some of the fund's top officers.

(Click here http://link.reuters.com/guz74g to see a copy of a previously sealed court document from the Tong lawsuit summarizing the sexual harassment and manipulative trading allegations.)

Steven Cohen only wants us to make money, he doesn't care or want to know our secrets to make money -- SAC doesn't need to know and doesn't want to know, Tong said in the filing, quoting one of Jiang's instructions to him.

CAMERA SHY

Cohen is so intensely private he hates being photographed and has even bought the rights to some pictures taken by freelancers. He has generally dealt with rumors and speculation about questionable trading strategies at SAC by simply ignoring them. That appears to be the strategy he is pursuing this time around as well. A lawyer for the hedge fund declined to comment.

Former SAC employees, however, have already started to talk. Lee's cooperation was secured in part because of incriminating evidence that federal authorities had captured from a government wiretap on his cell phone while working at San Jose, California-based Spherix Capital. (Kang oversaw the tap on Lee's phone.)

In pleading guilty on October 13, Lee signed a cooperation agreement that requires him not only to testify about his misdeeds at Spherix, but also provide prosecutors with any evidence of alleged insider trading over an eight-year period starting in 1999. He worked at SAC for five of them, and the rest of the time was at Stratix Capital Management.

The Wall Street Journal previously has reported that after Spherix closed its doors in February, federal authorities encouraged Lee -- who had begun cooperating with the investigation -- to try to return to SAC. But Cohen refused, the Journal reported, because he was suspicious of the reasons behind Spherix's closing.

Lee is also expected to testify about any improper trading he may have done at Stratix, a hedge fund founded by two more SAC alumni, Richard Grodin and Ian Goodman. That fund, which counted SAC among its investors, closed in 2007. Grodin launched another fund, Quadrum Capital, and it too abruptly shut down this year. A few months ago, federal authorities asked Quadrum to turn over some trading records, but the government hasn't asked for anything since, said a person close to the fund.

MAKING THE CRIMINAL CASE

Of course, Kang isn't infallible. A person familiar with the wiretap applications in the Galleon case cited one example he considered overreaching by Kang in trying to make a criminal case. In that instance, Kang had to make a revision in one wiretap application because he earlier made a wrong conclusion about the identity of a person referred to as Adam in one of the taped phone conversations. The person in question actually worked for Galleon -- not for another independent hedge fund, as Kang had thought, said this source.

Then again, Kang isn't working alone. The other main agent assigned to the Galleon investigation is David Makol, a seven-year veteran of the FBI's other major securities fraud task force based in Kew Gardens, Queens.

Makol had a featured role in the last big Wall Street insider trading prosecution, which centered around a former UBS managing director who took cash from a group of traders in exchange for providing them with advance notice of impending changes in stock recommendations by the investment bank's analysts.

As one of the first prosecutions to reveal the existence of an underground network of day traders and hedge fund managers who barter or buy non-public information to trade on, the UBS insider trading case has served as a road map of sorts for law enforcement in the Galleon investigation.

FRIEND OR FOE

Kang and Cohen haven't always been adversaries. In 2006, Kang was involved in bringing a criminal case against a person who tried to defraud SAC and other businesses. The case involved Michael Lair, a Montana man, who approached a lawyer defending SAC in a lawsuit the Canadian drug company Biovail Corp had filed against SAC. The man had offered to provide SAC's lawyer with allegedly incriminating information about Biovail's attorneys for a fee.

In fact, the Biovail lawyers fired Lair shortly before he approached SAC and its lawyer.

Kang signed the criminal complaint against Lair, who was charged with trying to defraud SAC, Biovail and other companies. In April 2007, Lair pleaded guilty and was sentenced to 27 months in prison. He was also ordered to forfeit some $300,000 in fees he had extracted from a dozen companies that he had fleeced in the scheme.

Six months later, the Galleon investigation was well under way and Kang was onto his next assignment that has opened a new window into Steven Cohen's world. (Reporting by Matthew Goldstein and Svea Herbst-Bayliss; editing by Jim Impoco and Claudia Parsons)

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