The hedge fund, WCG Management, sent an email to its investors on Sunday informing them that the $3.4 billion fund is not under investigation in the Libor probe, but confirmed that portfolio manager Ryan Reich has drawn scrutiny from U.S. prosecutors.

WCG said in the email, a copy of which was read to Reuters by a person who received it, that the fund had talked to Reich's attorney, and the lawyer said his client had "cooperated" with federal prosecutors.

The hedge fund added that Reich's lawyer said federal authorities have not asked any questions about Reich's work for WCG, where he has been a portfolio manager since July 2010.

A spokesman for the Department of Justice declined to comment.

Kenneth Ulbricht, the chief operating officer for WCG, did not respond to requests for comment on the hedge fund's email to investors. Reich's lawyer, Ira Lee Sorkin, a partner in the white collar defense group at Lowenstein Sandler, declined to comment on the hedge fund's email.

Reuters last week reported that Reich was drawing scrutiny from federal prosecutors in Washington, D.C., after being fired from Barclays in March 2010 for allegedly sending inappropriate emails seeking information concerning the pricing of Libor, information that could have been used in his trading positions.

In its investor email, WCG, referenced the Reuters story.

Libor, the London interbank offered rate, is used to set rates on trillions of dollars of contracts for everything from home mortgages to credit cards. The investigation has embroiled banks on both sides of the Atlantic and involves yen and euro rates as well as those for the dollar.

So far, there's no indication the authorities are looking at hedge funds in the Libor probe, but the investor email from WCG is an indication that the sprawling investigation is rattling nerves beyond the trading desks of big banks.

Lawyers familiar with the investigation say federal prosecutors continue to reach out to individuals to gauge interest in cooperating or taking pleas. They said prosecutors are expected to begin making decisions on charging individuals later this month or in early September.

When Reich worked at Barclays, he was a relatively junior trader on the firm's U.S. dollar swaps trading desk in New York. He joined Barclays in 2006, two years after graduating from Princeton University.

Barclays, as is customary in the brokerage business, notified the Financial Industry Regulatory Authority that it had dismissed Reich for sending inappropriate internal emails while at the bank.

People familiar with the investigation said that Reich could be a key witness for federal prosecutors as they try to build a case against individuals who allegedly tried to manipulate Libor rates at Barclays.

Reich's lawyer, Sorkin, is a former federal prosecutor and top lawyer for the Securities and Exchange Commission and has represented a number of notable clients over the years, including Bernard Madoff.

One of Reich's supervisors at Barclays was Jay V. Merchant, who left the bank at the end of 2009 to join UBS to run that firm's swaps desk in Stamford, Connecticut. Reuters previously reported that Merchant also has drawn scrutiny in the probe, which also involves regulators in the United States and the United Kingdom.

John Kenney, Merchant's lawyer, declined to comment. A spokeswoman for UBS said Merchant is to return Monday from vacation.

A person familiar with WCG, which was founded in 2007 by Barry Wittlin, a former top proprietary trader at Merrill Lynch, said the fund has no plans to reassign Reich because it believes he has done nothing inappropriate at the fund.

WCG is a macro hedge fund that specializes in trading bonds, currencies and interest rate swaps. With leverage, the fund controls about $13 billion assets, according to regulatory filings.

Not all funds have been as proactive as WCG in seeking to reassure clients about the fallout from the Libor probe.

Several of the world's largest global macro managers have spent months trawling through emails, voicemails and phone calls to check that their traders did nothing untoward, investors say, but this emerged only after those same investors pressed the funds to show they are clean and that there are no nasty surprises headed their way.

Most funds, when pressed on the investigation, have declined to comment.

(Additional reporting by Tommy Wilkes in London and Carrick Mollenkamp in New York; Editing by Leslie Adler)

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