Bear Stearns hedge funds saga continues

Date: Wednesday, January 2, 2008
Author: Cayman Net News Online

The multi-billion dollar collapse of two Cayman Islands hedge funds managed by investment giant Bear Stearns is set to continue to make headlines into the New Year.

As 2007 drew to a close, news was released that the US Attorney’s Office and the Securities and Exchange Commission (SEC) were looking at whether one of Bear Stearns’ senior managing directors, Ralph Cioffi, continued to promote the now-bankrupt funds while removing US$2 million of his own investments from them. The allegation being that this act amounted to insider trading.

Banking giants Barclays have now also joined the chase, filing claims for over CI$400 million, which allege Bear Stearns sold bad debt before they would have to be written down as a loss. Barclays alleges fraud, conspiracy and a breach of fiduciary duty.

Other groups are filing arbitration claims, a course they regard as more straightforward, quicker and not subject to complex appeal processes or legal delaying tactics, in order to recover lost investments.

The major complaint being pursued against Bear Stearns appears to be that the failed hedge funds were being sold to investors as low risk options when, according to one noted expert in the field and reported in BusinessWeek, more than 60 percent of the net assets in one of the funds, “were so illiquid or obscure that management randomly assigned their value.”

In the meantime, Massachusetts Secretary of State William F. Galvin is continuing his assault on Bear Stearns, who he has charged with engaging in inappropriate trading. An allegation he says is based on records, which apparently show the company traded from its own account with the hedge funds without the making required notifications to the funds’ Cayman Islands-based independent directors.

Other reports complain that the US$500,000 allocated to the accountants entrusted with the hedge funds’ liquidation is inadequate to ensure that the necessary work is conducted properly.

Mr Cioffi is now reported to have quietly left the firm and at least one media outlet in the USA is suggesting that Bear Stern’s CEO Jimmy Cayne may soon follow him. Mr Cayne is also reported to have just cashed in 172,621 Bear Stearns shares, accumulated under their annual profit and dividends programme, netting himself US$15.4 million.

In what is believed to a completely unrelated matter, the US attorney for West Texas has revealed that two former executives at Bear Stearns’ office in Dallas, Texas have entered guilty pleas to criminal charges arising from a far-reaching government corruption case in El Paso.

Last Friday, Roberto G Ruiz, Managing Director of Bear Stearns’ Dallas office until June 2007, admitted to four counts of conspiracy to commit mail and wire fraud uncovered during the investigation into El Paso’s community colleges and city and county governments.

Christopher Chol-Su Pak, a former Vice President at Bear Stearns, admitted bribing a county commissioner.

A Bear Stearns spokesman is reported to have said that neither of the accused have any current connections with the company.

However, according to published reports, Bear Stearns has financed more than US$2 million in municipal bonds in El Paso, and the investigation continues into the relationship among El Paso elected officials, Mr Ruiz, Mr Pak and possibly others.