By Jake Zamansky
When I first disclosed in August that I had filed claims on behalf of investors in the failed Bear Stearns structured credit hedge funds, some media pundits were incredibly skeptical. “Hedge funds are inherently risky,” they frothed. “Investors shouldn’t expect legal redress if they go south.”
But the truth is that many investors, including those I represent, had good reason to believe that the Bear funds were “conservative” investments. Yes, the offering memorandum contained the standard boiler plate, “This is a risk investment and you should be prepared to lose all your money,” but that isn’t how the funds were marketed to investors. Quite the contrary: Some of my clients were assured that the funds were conservative, with upside returns of between 10-12% and a downside risk decline of only 10%.
The Bear funds were anything but conservative. As excellently chronicled by BusinessWeek, more than 60% of the net assets in one of the funds were so illiquid or obscure that management randomly assigned their value. And with the advantage of hindsight, we know that at the least Cioffi and his cohorts were wearing very high amplification rose-colored glasses when they concocted these values.
My initial skepticism about the Bear funds has attracted some impressive company:
• The U.S. Attorney’s Office and the SEC are examining whether Cioffi engaged in insider trading by removing $2 million of his own investments out of the funds while continually marketing the funds as a great investment opportunity.
• Massachusetts Secretary of State William F. Galvin has charged BSAM with engaging in inappropriate trading of complex securities from its own account with hedge funds without the required notifications to the funds' independent directors.
• Barclays has filed a claim likely worth over $400 million alleging Bear Stearns was unloading its “toxic waste” in the form of bad debt, presumably before the debt would have to be written down as a loss. Barclay’s alleges fraud, conspiracy and a breach of fiduciary duty.
Bears’ clients should all take note how the firm is handling the collapse and treating its clients. First, the company insisted that the funds’ bankruptcy proceedings be held in the management-friendly Cayman Islands, making any meaningful recovery for investors exceptionally difficult. Bear also tried to use its muscle to prevent the overthrow of its asset management arm from being dismissed as the overseer of the funds’ liquidation. Bear has allocated a measly $500,000 to the accounting firm KPMG to investigate the funds’ collapse, thereby assuring that no meaningful findings will be discovered or revealed.
Investors are employing several different legal strategies in order to recoup losses. Some attorneys are pursuing litigation claims in the courts, a somewhat risky strategy because there are no guarantees that judges will allow the cases to proceed. Moreover, Wall Street firms have the resources and financial muscle to drive up costs with incessant motions and appeals, so the legal costs of pursuing recovery could be extremely prohibitive as the proceedings will likely drag on for years.
Some attorneys, including me, are filing arbitration claims. Filing arbitrations through FINRA assures an expedited case that will be heard and decided probably within two years. Moreover, it is rare for a FINRA arbitration claim to be dismissed. Another critical advantage to arbitration is that appeals rarely succeed – so a win in arbitration usually sticks.
If recent weeks are any indication, the body blows will keep coming for Bear Stearns. Cioffi has quietly left the firm and CNBC’s Charlie Gasparino has reported that Bear Stearns’ board may even be discussing the departure of CEO Jimmy Cayne. The next shoe likely to drop is the U-5 form that Bear Stearns is required by law to file disclosing the reasons for Cioffi’s departure.
My firm this week served Bear with a request for a wide swath of documents that should shed some additional light on why the firm’s hedge funds collapsed. In preparing the documents I couldn’t help but feel a sense of déjà vu. Some six years ago I served Merrill Lynch with a similar document request relating to the firm’s now infamous tech analyst Henry Blodget.
Sadly, not much has changed in the interim on Wall Street.
Jake Zamansky is a partner at Zamansky & Associates, a New York-based securities arbitration law firm. His firm focuses on helping victims of securities fraud recover money lost due to negligence or unscrupulous actions on the part of stockbrokers or other investment professionals. More of Zamansky’s musings can be found on his blog at http://www.zamansky.blogspot.com/