Entire Business Week article:
Probe of Insider Trading at Bear Stearns
Federal investigators are examining whether some insiders pulled money out of Bear's troubled hedge funds, while others were blocked from doing so
The investigation by securities regulators and federal prosecutors into this summer's collapse of two Bear Stearns (BSC) hedge funds that invested in risky securities backed by subprime mortgages is heating up. BusinessWeek has learned the Securities & Exchange Commission and the U.S. Attorney's office in Brooklyn are looking into an allegation that some Bear Stearns insiders associated with the funds may have been pulling their personal money out of the investment vehicles this spring when the market was in turmoil. The alleged redemptions occurred, sources say, during a time the funds' managers were urging other investors to stay put.
It's not clear which insiders at the Bear Stearns funds are drawing scrutiny. People familiar with the probe say investigators have been reaching out to investors in the highly leveraged funds, seeking information about the comments the funds' managers made during the spring with regard to the issue of redemptions, as well as the funds' exposure to the subprime mortgage market. The funds once controlled nearly $35 billion in collateralized debt obligations and other mortgage-backed securities, and investors lost a combined $1.6 billion when the funds filed for bankruptcy in July.
Lawyers for the funds' top managers, Ralph Cioffi and Matthew Tannin, either declined to comment on the investigation or did not return phone calls seeking comment. A Bear spokesman did not return a telephone call and an e-mail seeking comment. John Nestor, an SEC spokesman, says, "It's our policy to neither confirm nor deny investigations." A spokesman for Eastern District of New York U.S. Attorney Benton Campbell declined to comment.
Removed from Their Posts
The number of hedge fund insiders under scrutiny could be greater than one or two employees. At its peak, Bear Stearns Asset Management, the alternative investment arm of the big Wall Street firm led by Chief Executive James Cayne, employed about 140 people, many of whom did work for the hedge funds. Bear has since either dismissed or laid off dozens of BSAM employees.
Cioffi and Tannin, once senior employees at BSAM, were reassigned and appointed as advisers to the asset management group. BSAM's chairman and CEO, Richard Marin, was removed from his post and also named a special adviser. Marin did not return a call seeking comment. The most high-ranking casualty of the hedge fund imbroglio at Bear Stearns was Warren Spector, the investment firm's former president and co-chief operating officer. Spector was forced out in August, after the funds filed for bankruptcy in July, wiping out $1.6 billion in investor money. An attorney for Spector did not return phone calls seeking comment.
The issue of redemptions has been a point of frustration for investors in the elegantly named High Grade Structured Credit Strategies and High Grade Structured Credit Strategies Enhanced Leverage funds. Investors, including wealthy individuals and savvy asset-management firms, began submitting redemption notices in February, when the first signs of trouble began to emerge in the subprime housing market. Investors were told the earliest they could redeem their money was at the end of June, according to the funds' internal guidelines. But the June 30 redemption deadline was too late for most investors, as Cioffi and his team began barring investors from pulling money out the funds in early June.
Getting Back on Track?
Ross Intelisano, a New York attorney who represents a number of hedge fund investors, says if the allegation of insiders getting preferential treatment is true, it would be bad news for Bear, which is already named in a number of arbitrations and lawsuits. "People were trying to get out as early as February and March," says Intelisano. "If you open the gates just for the insiders, it will hurt (Bear) in litigation."
Scott Berman, an attorney who specializes in hedge fund litigation, says not all insider redemptions are improper. He notes insiders could have economic reasons for pulling money out of a fund, and often the offering documents for a fund will give managers some latitude on the issue of when they can withdraw their own money.
During the spring, Cioffi and Tannin did their best to convince investors that the Bear funds were poised for a rebound. In an Apr. 30 conference call with investors, Cioffi said, "We have a plan in place that will get the funds back on track to generate positive returns." In that same call, Tannin said he was confident the "structured credit market, and the subprime market in particular, has not systemically broken down."
Meanwhile, BusinessWeek has also learned that the collapse of two Cioffi-led funds caused another hedge fund casualty at Bear. In recent weeks, BSAM has begun notifying investors in the Bear Stearns Multi-Strategy Fund that it plans to liquidate that $100 million investment vehicle. The fund, which only invested in Bear-managed hedge funds, put several million dollars in the Cioffi-led funds.
Goldstein is an associate editor at BusinessWeek, covering hedge funds and finance. Henry is a senior writer at BusinessWeek.
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John Dec 18, 2007 4:02 AM GMT Looks like it wasn't only the poor people and the "ignorant" who got screwed by the subprime mess. Hopefully some of our "financial advisors" can be taken to task on this one. As always, it's "buyer beware."
William Dec 18, 2007 3:19 AM GMT Bear Stearns is always being exposed for this kind of fraud. Why would anyone trust Bear Stearns with their nest egg?
gretasummers Dec 18, 2007 2:39 AM GMT If true maybe Jimmy Cayne will finally be forced out and he will have more time for playing bridge while this ship sinks even further!
Rescue Rick the Grass Cut Man Dec 18, 2007 12:36 AM GMT Rescue Rick the Grass Cut Man is here today to trim the unruly hedges - some hedge funds. Rescue Rick the Grass Cut Man is a yard safety super hero who strives to rescue individuals from accidents involving green grass and now greenbacks. Rescue Rick the Grass Cut Man is here today to rescue the investor from getting mulched on Wall Street. Think before you invest. It hurts. Please be careful with your investment decisions.
Dr. David S. Baskin Dec 17, 2007 10:45 PM GMT AS a former employee working throughout the firm in areas such as strategic planning and leadership coaching, I can lend a real-time assessment to the internal functioning of Bear Stearns. I have subsequently, as a executive leadership and organization development consultant, extensive experience to compare various organization. Bear Stearns always went beyond the "call of duty" to ensure that customers were treated with ethical standards with no room to tolerate less. I remember being in the Chicago office and being with a banker who was being verbally punished because Ace Greenberg (the previous CEO) thought the banker had overcharged a customer $50.00. This model of honesty and caring for the customer has permeated every member of the firm I was acquainted with. I understand things change, however, every name that has been in the news of late are the same people I knew and respected.
charles Dec 17, 2007 10:26 PM GMT Anyone who is a crook should be put in jail and have their goodies taken away.
Howard Johnson Dec 17, 2007 9:51 PM GMT Here's hoping that scrutiny of possible insider trading is not limited to the Bear Stearns debacle.