Ralph Cioffi, the former Bear Stearns hedge fund manager indicted for fraud stemming from the collapse of his two funds, brazenly ignored and evaded the firm’s compliance requirements, prosecutors allege in a new court filing.
The U.S. Attorney’s Office in Brooklyn, N.Y., filed the letter with U.S. District Judge Frederic Block, seeking admission of the evidence at Cioffi’s trial, which is set to begin in October.
According to prosecutors, Cioffi was “repeatedly counseled” by Bear’s compliance staff, but nevertheless “rarely adhered” to trading compliance measures. In fact, he grew more and more cavalier as time went on, with “hundreds of transactions that presented conflicts [that] did not obtain the approvals required by federal law and by the offering memoranda,” Assistant U.S. Attorney James McGovern wrote to the judge.
In fact, prosecutors allege, the number of such transactions soared between 2003 and 2006. In the former year, just 18% of transactions that needed prior approval from unaffiliated directors were missing them, rising to 29.73% in 2004, 58.66% in 2005 and a whopping 78.95% in 2006, the letter states. Cioffi’s hedge funds collapsed amidst the subprime mortgage meltdown in 2007, costing investors $1.6 billion.
What’s more, the former manager of the High-Grade Structured Credit Fund and a more highly-levered sister fund increasingly sought to cut Bear management out of the loop after it rejected his bid to pledge $2 million of his investment in one of the funds as collateral for a loan to finance the building of a “luxury condominium complex” in Florida.
When Bear learned of Cioffi’s plan, they refused permission.
“Cioffi became extremely upset and accused the general counsel of [Bear Stearns Asset Management] of being behind the decision,” prosecutors say.
Instead, they allege, he simply redeemed the $2 million—one-third of his investment in his own funds—just before the collapse and hid the fact from Bear Stearns.
“Cioffi knew that his request to withdraw money from the Enhanced Fund would have been scrutinized and, in all likelihood, refused by Bear Stearns Asset Management,” prosecutors wrote. “The government will show that this anticipated denial contributed to Cioffi’s decision to conceal the existence of his redemption from relevant management,” and especially his bête noir, BSAM’s general counsel.
“These prior uncharged acts provide probative evidence that Cioffi knowingly engaged in insider trading,” the letter goes one. “The government will prove that the defendant redeemed his investment in the Enhanced Fund so that he could reinvest the $2 million in another, more profitable fund under his control.”
Cioffi and the funds’ former chief operating officer, Matthew Tannin, are accused of misleading investors about the health of the funds just prior to their collapse. Tannin, who is not charged with insider trading, faces up to 20 years in prison if convicted; Cioffi could get as much as 40 years.