Prosecutors Search For Fraud In Bear Investor Call

Feb 15 2008 | 12:49pm ET

Federal prosecutors looking into the collapse of two Bear Stearns hedge funds are focusing on whether the funds’ managers misled investors in a conference call about the state of the funds.

The U.S. Attorney in Brooklyn. N.Y., is looking into whether fund manager Ralph Cioffi’s comments in the April 25, 2007, call mesh with his actions and private comments to colleagues, or whether they constitute fraud, according to The Wall Street Journal. But, contradicting reports that Bear itself was in danger of being indicted, the Journal says that Bear is unlikely to be charged and has not received a Wells notice, which would indicated that charges are imminent.

On the conference call in question, Cioffi told investors that he was “cautiously optimistic” about the ability of the High-Grade Structured Credit Fund and its more levered counterpart to hedge their subprime holdings. He also reportedly snapped that he didn’t have time to teach “CDO 101” when asked if the funds’ collateralized debt obligations were tied to subprime mortgages.

But prosecutors are probing whether his “cautious optimism” was merely for public consumption. In March 2007, he transferred $2 million of his own money from one of the funds to another in-house fund. Furthermore, the Journal reports, Cioffi, in internal e-mails, discussed with colleagues about the troubles in the credit markets, including potential trouble for his own funds in the subprime market.

Neither Cioffi nor his co-manager, Matthew Tannin, have been issued grand jury subpoenas. But both are reportedly considering the offer of informational interviews with prosecutors. And both plan a forceful defense should they face charges.

According to the Journal, Cioffi will argue that his transfer of the $2 million was not in response to growing trouble in the High Grade fund, but rather designed to show confidence in a new fund. He’ll also point to the fact that Bear’s compliance officers approved the move. And both men will depict the internal conversations as standard discussions about the state of the market and not a case of saying one thing internally and another to investors.

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