If it's the same as the Irvine .40 I had once, it's a bearing engine and a finely made one at that. Pull the head and see what's there. If nothing is obviously wrong, do a proper torque sequence when you put it back on and go a full turn past snug.

On a troubleshooting note, does the engine hold compression when you turn it over by hand? If it's leaking that bad, you should be able to tell if there's a compression leak or maybe even no compression at all. If you're not sure, get a feel for how it turns over with the glow plug installed and then take it out. If it's noticeably easier to turn the engine over with the plug out then you are holding compression and don't have a head leak.