Today’s Wall Street Journal reported in an article by Kate Kelly that the criminal investigation into the collapse of two internal Bear Stearns hedge funds could hinge on whether the funds’ managers misled investors during a conference call in the Spring of 2007.
In an investor call held on April 25, 2007, Ralph Cioffi, the funds’ manager, said that he was “cautiously optimistic” about Bear’s ability to hedge its securities tied to subprime home loans. One month earlier, however, Cioffi had moved $2 million of his own money out of one of the two troubled funds and into a newer and less risky Bear internal fund. At the same time, Cioffi was engaging in discussions with colleagues ? some of which were conducted by email ? about the worrisome state of credit markets and whether the declines in the subprime securities would be trouble for his funds.
Prosecutors in the US Attorney’s Office in Brooklyn, New York are examining whether any disparity between the public and the private comments of Cioffi and others could constitute fraud. No grand jury subpoenas have yet been issued.
Prosecutors are also concerned about one of Cioffi’s responses to a question during the investor call. When asked whether the CDOs in one of the funds was tied to subprime mortgage assets, Cioffi replied that he did not have the time to teach the caller “CDO 101” or answer basic questions about the securities.
Lawyers for Cioffi and fund co-manger Matthew Tannin may recommend that their clients volunteer to sit for an informational interview with the prosecutors. Richard Marin, the former head of Bear Stearns Asset Management, and Evan Kerr, one of the funds’ salesmen, have already met with prosecutors.
Cioffi and Tannin plan to assert an aggressive defense to any possible charges. Cioffi is likely to argue that the movement of his $2 million was approved by the firm’s compliance department as a way to show confidence in a new fund. He and Tannin are also likely to portray their discussions about market turmoil and its possible effect on their funds as standard exchanges between money managers.
Bear had been cooperating with the prosecutors and it is believed unlikely that the firm will be indicted. The SEC’s parallel investigation is still ongoing.
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