Former Bear Stearns Manager Is The Prime Subprime Suspect


Ralph R. Cioffi, the former manager of the two Bear Stearns hedge funds whose collapse last year triggered the credit crisis, is the prime suspect in investigations by the Justice Department and the SEC as reported recently by

The investigations are proceeding on two fronts: first, whether Cioffi and his team deliberately misled investors about the funds’ health; and second, whether Cioffi and his team placed false values on collateralized debt obligations (CDOs).

The issue of CDO valuation ? valuation based on internal models rather than actual market values ? had been controversial ever since the CDO market collapsed in 2007. The article contained the following quote: “If the valuations become a criminal issue [for] Bear Stearns, it would send a warning shot across the bow of every firm that marketed these exotic products,” said Steven B. Caruso, an attorney representing several Bear investors who is part of the coalition representing subprime investors in which Page Perry participates.

Proof of such fraud is hard to uncover and even harder to explain to a jury. Prosecutors look for evidence that managers intentionally falsified the price of a security ? usually in the form of a smoking gun email. The prosecutors in this matter are also spending a lot of time interviewing investors and lower-level Bear employees. They are focusing on what Cioffi and his team were doing in the period right before the funds fell apart, including whether they were downplaying the number of investors seeking to unload their investment and whether there were inconsistencies between Cioffi’s bullish comments in conference calls and his emails or other communications.