Ex-Bear Hedge Manager Allegedly Sought to Use Funds for Condo

Date: Thursday, August 20, 2009
Author: Patricia Hurtado, Bloomberg

Former Bear Stearns Cos. hedge fund manager Ralph Cioffi, indicted for an alleged fraud that helped bring down the securities firm, attempted to use his $2 million redemption from a fund he supervised as collateral for a condominium, U.S. prosecutors said.

Cioffi, 53, also “rarely” heeded compliance trading measures, the government said in a court filing in Brooklyn, New York, federal court. Cioffi and another former Bear Stearns hedge fund manager, Matthew Tannin, 47, were indicted last year for misleading investors about the health of two hedge funds that failed in July 2007, costing investors $1.6 billion. The implosion helped trigger the credit crunch and the eventual sale of Bear Stearns to JPMorgan Chase & Co.

Cioffi, who managed the two funds, is also charged with insider trading for redeeming $2 million from the Bear Stearns Enhanced Fund, one third of the amount he’d invested in the funds. The U.S. says Cioffi used non-public, material information to make the withdrawal and save his investment before both funds collapsed in July.

“These prior uncharged acts provide probative evidence that Cioffi knowingly engaged in insider trading,” prosecutors said in a letter filed with the court Aug. 18. “The government will prove that the defendant redeemed his investment in the Enhanced Fund so that he could re-invest the $2 million in another, more profitable fund under his control.”

Sought to Pledge

Last month, U.S. District Judge Frederic Block in Brooklyn, New York, rejected Cioffi’s bid to get the insider-trading charge dismissed on grounds that he didn’t owe a duty to his clients. Cioffi’s lawyer, Dane Butswinkas, couldn’t be reached for comment.

The government says that in 2006, prior to the funds’ collapse, Cioffi sought to pledge his investment in the fund as collateral for a building loan for a “luxury condominium complex” which he and his brother were building in Sarasota, Florida.

Bear Stearns learned of Cioffi’s attempt to use the redemption as collateral for the condominium development and refused to permit him to encumber his holdings in the fund, prosecutors said.

“Cioffi became extremely upset and accused the general counsel of BSAM of being behind the decision,” the U.S. said in court papers.

Under Scrutiny

Prosecutors seek to have evidence of Cioffi’s failed loan bid be heard at his trial. The U.S. says it is evidence Cioffi knew he was supposed to inform Bear Stearns about his sale of securities and that he later intentionally concealed the $2 million transaction to make other investments, according to the court filing.

“Cioffi knew that his request to withdraw money from the Enhanced Fund would have been scrutinized and, in all likelihood, refused by Bear Stearns Asset Management,” the U.S. said.

“The government will show that this anticipated denial contributed to Cioffi’s decision conceal the existence of his redemption from relevant management, and in particular, the general counsel” of Bear Stearns Asset Management.

Conflicted Transactions

Prosecutors also said that while Cioffi was “repeatedly counseled” by Bear Stearns compliance staff, he nevertheless engaged in conflicted transactions and “rarely adhered” to trading compliance measures regarding transactions. The government also asked to introduce testimony from conversations he had with Bear Stearns compliance personnel about conflicts of interest.

“Hundreds of transactions that presented conflicts did not obtain the approvals required by federal law and by the offering memoranda,” Assistant Brooklyn U.S. Attorney James McGovern said in the letter filed with the court.

The U.S. said that of the transactions that required prior approval by Unaffiliated Directors, 78.95 percent were missing such approval in 2006, 58.66 percent were missing in 2005, 29.73 percent were missing in 2004 and 18 percent were missing in 2003.

To remedy the poor compliance, Bear Stearns placed a moratorium on all trades between Bear Stearns Co. and Bear Stearns Asset Management in late 2006. Cioffi was also advised that he needed to “develop and enforce procedures” to ensure the notification of the Unaffiliated Directors,” the government said.

Both men are scheduled to go on trial in Brooklyn federal court Oct. 13, in a case that was filed last year by the office of Brooklyn U.S. Attorney Benton Campbell.

Cioffi, now with Tenafly, New Jersey-based RCAM Capital LP, and Tannin face as many as 20 years in prison if convicted of conspiracy to commit securities fraud. Cioffi faces an additional 20-year term if found guilty of insider trading.

The case is U.S. v. Cioffi, 08-CR-00415, U.S. District Court, Eastern District of New York (Brooklyn).

To contact the reporter on this story: Patricia Hurtado in federal court in Brooklyn at pathurtado@bloomberg.net.