Archive for the “Bear Stearns Hedge Funds” Category

The acquittals of Ralph Cioffi and Matthew Tannin, two former Bear Stearns hedge fund managers, may portend a dramatic shift in the way prosecutors approach similar cases involving allegations of securities fraud. In particular, they will likely be more prone to rethink the importance and value of getting the right experts on board.

It was the testimony by expert witnesses that apparently swayed the jury in the Cioffi/Tannin trial. As reported in a Nov. 11 article by the Wall Street Journal, one jury member, Aram Hong, said she looked at Cioffi “as the captain of a sinking ship who tried to do whatever he could to save it.” Her reasoning was aided via testimony by the defense’s expert witnesses and, in particular, of R. Glenn Hubbard.

According to the Wall Street Journal article, Hubbard, the dean of Columbia University’s business school, testified that he had reviewed data about the collapsed Bear Stearns hedge funds and reached the conclusion that Tannin and Cioffi could, in fact, reasonably expect the funds to return to profitability.

Prosecutors, meanwhile, had argued that the two men knowingly deceived investors about the fiscal health of the funds and that they were well aware the mortgage-related funds were headed for trouble. Ultimately, losses in the funds cost investors about $1.6 billion and launched the near demise of Bear Stearns itself. The firm avoided bankruptcy when it was bought out by JPMorgan Chase & Co.

As evidenced by the verdict, the jury rejected prosecutors’ line of thinking regarding Cioffi and Tannin.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Former Bear Stearns managers Ralph Cioffi and Matthew Tannin were found not guilty on charges they lied to investors who lost $1.6 billion in two failed hedge funds in the summer of 2007. The jury deliberated less than a day before reaching its verdict.

As reported Nov. 10 by Bloomberg, the Cioffi/Tannin trial is the first criminal trial to result from the government’s probe into the collapse of the housing market. That event is said to have cost investors nearly $400 billion and trigger a global breakdown of the world’s financial markets.

Cioffi and Tannin faced as many as 20 years in prison on charges of conspiracy, securities fraud and wire fraud.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Ralph Cioffi and Matthew Tannin, the two former Bear Stearns hedge fund managers, apparently won’t testify in their own defense in the first criminal trial related to the mortgage meltdown. Both men are accused of securities fraud, with prosecutors alleging they repeatedly lied to investors about the fiscal health of two hedge funds that collapsed amid the mortgage crisis in the summer of 2007. Investors in the funds lost about $1.5 billion.

Among the allegations against Cioffi is that he lied to investors during a conference call in April 2007. On the call, Cioffi reportedly said that, collectively, investors planned to withdraw a “couple million” dollars from the funds. Prosecutors, however, contend Cioffi made the statement only two days after learning one investor, Concord Management LLC, intended to withdraw $57 million.

Closing arguments in the case will begin Nov. 5. If convicted, Cioffi and Tannin could face up to 20 years in prison.

The case is U.S. v. Cioffi, 08-CR-00415, U.S. District Court, Eastern District of New York (Brooklyn).

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This week signals the start of the criminal trial for Ralph Cioffi and Matthew Tannin, the two former Bear Stearns executives who cost investors millions of dollars after allegedly deceiving them about the fiscal health of two  Bear Stearns hedge funds that collapsed under the weight of mortgage-laden investments. For many, the long-awaited trial, which gets underway Oct. 13, will be viewed as a legal barometer of when and how Wall Street should disclose bad news to investors and where the boundary lies between acceptable corporate public relations and outright fraud.

Wall Street has a lengthy history of putting a positive spin on bad news, mistakes and miscalculations. As reported Oct. 12 by the Wall Street Journal, two years following the onset of the financial crisis and countless government investigations of investment firms and their stock brokers, Cioffi and Tannin are the only individuals of a major Wall Street firm to face the threat of prison. The short list underscores the difficulty of assigning blame for Wall Street’s errors, says the Wall Street Journal article.

At the heart of the Cioffi and Tannin case is the issue of whether the two men misled investors with the intent to defraud them. Among the ammunition prosecutors will present:

• Emails and phone recordings from an April 2007 conference call in which Cioffi states he is “comfortable” with the funds’ performance. Several days prior to that call, however, Cioffi emailed a colleague about an internal report on the funds, writing that if the information prepared was “ANYWHERE CLOSE to accurate, I think we should close the funds now.”
• Cioffi allegedly tells investors during the April 2007 investor conference there was just a “couple of million dollars” of redemptions requested by investors in June. In reality, one investor, Concord Management, previously informed Bear Stearns it wanted to withdraw its entire $57 million investment.
• Testimony from investors who relied on statements about how much Cioffi and Tannin invested their own personal money in the funds. To raise more money from investors, prosecutors say Tannin allegedly told investors several times in March 2007 that he was “adding more” of his own money into one of the funds, but never did.
• Statements by Cioffi, who is accused of telling Bear Stearns brokers that he had $5.5 million of his money in one of the funds in May 2007 when, in fact, he had taken out $2 million months earlier.
• Emails and transcripts that point to additional motive by Cioffi to keep the funds alive because they served as collateral for a real-estate loan on Sarasota, Florida, condominium he was building.

The case is U.S. v. Cioffi and Tannin 08-415 in U.S. District Court, Eastern District of New York (Brooklyn).

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Ralph Cioffi and Matthew Tannin are the leading players in perhaps one of the most eagerly awaited trials in Wall Street history. Cioffi and Tannin are the former managers of two failed Bear Stearns hedge funds
- the High-Grade Structured Credit Fund and the Enhanced Leveraged Fund - that ignited the market meltdown in 2007. Now it appears there’s a new twist to their trial, with Cioffi accused of trying to get his hands on loan documents in Florida ahead of the government’s subpoena.

Prosecutors have long alleged that Cioffi, with Tannin’s help, illegally used his investment in his own hedge funds as collateral for a loan from Busey Bank in Ft. Myers, Fla., which was to help end a foreclosure threat against a Florida condominium development owned by Cioffi and his brother.

According to an article appearing Oct. 2 in Fortune magazine, Cioffi made a fast trip to Florida on Sept. 18 for the purpose of allegedly getting his hands on the original copies of the loan documents from Busey Bank officials.

Prior to the trip, the article says Cioffi called a Busey Bank employee on Sept. 8 to locate the loan records. On Sept. 16, another call was placed by Cioffi to the employee. During their conversation, Cioffi reportedly told the individual that he would be travelling to Florida and wanted to accompany her to the “bank’s storage facility” so that he could personally look for the documents in question. On Sept. 17, the government informed the federal court about the subpoena it had issued to Busey Bank regarding the Cioffi loan documents.

On Sept. 18, Cioffi did in fact fly to Florida to try and retrieve the documents. In an alleged voicemail message left for a bank employee, Cioffi said: “Jen, Hi, Ralph Cioffi calling, it’s Friday morning, it’s 8:30 a.m., I’m actually on my way to Ft. Myers from Newark Airport, New Jersey. I land about 12:15. I’ll call you when I land. I was hoping to in the meantime you might have been able to find the file and if you had, I would love to come by and get a fax copy of the document or the document itself. In any event, my number is [number redacted], if in fact you wanted to call me and leave me a message one way or another. If I don’t hear from you I’ll check in when I land. Thanks.”

When a bank employee informed Cioffi his original loan documents had not been located, Cioffi asked that the originals be sent by “Federal Express to his residence in Tenafly, New Jersey.”

The U.S. Attorney’s Office in Brooklyn has since written a letter to U.S. District Judge Frederic Block, stating that, “Cioffi’s attempt to take possession of the original documents before Busey Bank could turn them over to the government, pursuant to a valid federal subpoena, is troubling and could have impeded the government’s ability to obtain the original loan documents. Such conduct, depending on the defendant’s motive, may be punishable as a felony under federal law.”

Meanwhile, prosecutors are calling Cioffi’s latest actions consistent with a cover-up. As for Cioffi, he contends the Florida trip was key to exonerating himself.

A court will decide on who’s right or wrong on Oct. 13, when the much-awaited trial of Ralph Cioffi and Matthew Tannin officially gets underway.

The case is U.S. v. Cioffi, 08-cr-00415, U.S. District Court, Eastern District of New York (Brooklyn).

Tell us about your situation with Bear Stearns by leaving a message in the Comment Box below or via the Contact Us form. We want to counsel you on your legal options.

Bruce Sherman, co-founder of Private Capital Management LP, is suing Bear Stearns Cos., its former chief executive officer James Cayne, Warren Spector, former co-president and chief operating officer, and the auditing firm of Deloitte & Touche for allegedly overstating the value of Bear’s mortgage-backed and asset-backed securities and the quality of its risk management.

As reported Sept. 25 by the Wall Street Journal, the lawsuit claims that Cayne and others at New York-based Bear Stearns misled and misrepresented facts to investors about the firm’s financial health prior to its Federal Reserve-forced sale to JPMorgan Chase & Co. in March 2008.

“[The] defendants knew that the market and the financial press would view Sherman’s sale of his Bear stock as a loss of confidence in Bear by a well-known and long-standing investor,” the lawsuit said.

“This, in turn, would have undermined confidence in Bear’s management at a critical time when Bear’s liquidity and Bear’s valuation of its assets were open to question following the implosion of two Bear-sponsored hedge funds in the summer of 2007.”

At one time, Sherman was Bear Stearns’ largest stockholder, owning a 5.9% stake, or 5.5 million shares valued at more than $475 million before falling to nearly zero when Bear collapsed. Sherman eventually sold his stake at a huge financial loss and retired from PCM, which is a unit of Legg Mason.

In March 2008, Bear Stearns was sold to JPMorgan Chase for $1 billion. Only two months earlier, the investment firm had a market value of $20 billion.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Warren Buffett famously called them “financial weapons of mass destruction,” and as it turns out, he was right. Collateral debt obligations (CDOs) not only brought down investment powerhouse Bear Stearns, but eventually also wreaked havoc on the nation’s entire financial system.

The exotic world of structured finance products is the subject of new book by author William Cohan, a former Wall Street banker for 17 years and best-selling author of The Last Tycoons: The Secret History of Lazard Frères & Co. Cohan’s new book, House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, explores the ripple effects of CDOs and how one of the country’s most formidable investment firms ultimately would bring about its own demise by betting heavily on these toxic mortgage-backed securities.

An excerpt of Cohan’s book is in the March 4 issue of Fortune magazine. Among other things, the article traces how an ill-fated decision by Bear Stearns management to become big players of CDOs and other risky financial instruments produced disastrous consequences for Bear Stearns and, later, financial markets everywhere.

At the center of Cohan’s story, of course, are Ralph Cioffi and Matthew Tannin, the two hedge fund managers largely credited with bringing Bear Stearns to its knees after losing billions in two collapsed hedge funds, while costing thousands of unsuspecting investors their life savings.

On June 19, 2008, the two men were arrested for allegedly misleading investors about the financial state of the two hedge funds they managed, the High Grade Strategy and Enhanced High Grade funds. Among other charges, Cioffi and Tannin were accused of deceiving their own investors and the funds’ institutional counterparts by fraudulently concealing from them the full extent of the funds’ deepening troubles.

Both the High Grade Strategy and Enhanced High Grade hedge funds failed in June 2007. Before crashing, the funds had more than $20 billion in assets.

The fall of 85-year-old Bear Stearns is without precedent. The company first joined the ranks of publicly traded Wall Street firms in October 1985. The share price of its initial public offering was $6. In January 2007, Bear Stearns stock peaked at $171.50. Throughout its entire history of doing business, the investment firm never had a losing quarter.

Then, in November 2007, the world changed for Bear Stearns. The company incurred a net loss of $854 million after lowering the valuation of its inventory of mortgage securities. Several months later, news of Cioffi and Tannin’s subterfuge came to light. And the rest, as they say, is history.

House of Cards: A Tale of Hubris and Wretched Excess on Wall Street by William Cohan is set for release on March 10.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

Things are getting ugly for OppenheimerFunds these days. Not only has Tremont Capital Management, which Oppenheimer owns, lost hundreds of millions of dollars in the Bernie Madoff scandal, but bad bets on toxic mortgage-backed securities and credit-default swaps have decimated bond funds like the Oppenheimer Core Bond Fund and the Oppenheimer Champion Income Fund.

The Oppenheimer Champion Income is down more than 80%, making its performance one of the worst among bond funds for 2008. As for the Oppenheimer Core Bond Fund, it is down by more than 42%.

As reported Dec. 18 in a story by Eric Jacobson on Morningstar.com, the Core portfolio carried approximately $400 million in mortgage-backed securities as of the end of March 2008, “exceeding its (then) $2.2 billion in net assets via transactions that were effectively akin to margin borrowing.”

The fund also had approximately $800 million in exposure to credit via default swaps, including American International Group (AIG), Lehman Brothers, Wachovia, Washington Mutual, and Bear Stearns, as well as around $600 million in total return swaps. These facts, critical to investors, were never included on the fund’s balance sheet, according to the article, and therefore did not appear in its net assets.

By the end of September, the Core Bond’s credit exposure to those various markets “totaled more than 180% of net assets on a dollar basis,” says the Morningstar article. To put it another way, for every shareholder dollar in the fund, it was exposed to the credit-driven movement of more than $1.80 worth of toxic securities.

Making matter worse: Most of the additional market exposure came from off-balance-sheet derivatives, giving the appearance to investors that the funds’ portfolios were not highly leveraged and therefore more fiscally sound than what was reality. And despite the fact that both the Core Bond fund and the Champion Fund were highly exposed to commercial mortgage-backed securities, detailed information regarding the extent of that over-concentration was and is no where to be found in any of Oppenheimer’s marketing materials or on Web site.

The ramifications of Oppenheimer’s behind-the-scenes gamble with derivative bets gone bad have been painful for investors. In particular, parents who invested in several state-run college savings plan are facing major financial losses because of portfolios containing the sinking Oppenheimer funds. To top it off, the losses hit the most conservative plans the hardest.

In Oregon, the 529 College Savings Plan includes more than 70,000 investors who are saving college money for 100,000 children, grandchildren and others. The plans in the network are worth about $750 million. One year ago, the value was $1 billion. About $89 million was invested in the Oppenheimer Core Bond Fund in September 2008.

In October 2008, the board that oversees the Oregon College Savings Plan questioned Oppenheimer about the fund’s poor performance. At the time, Oppenheimer managers said they bought the mortgage-backed securities when they believed the price had bottomed out. However, the securities continued to lose value, yet Oppenheimer just kept buying them.

In Oregon’s case, an investigation with the attorney general’s office is underway regarding Oppenheimer’s actions. But the bottom line is clear: The returns on the funds simply don’t add up to what Oppenheimer represented.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

The year of 2008 will likely be remembered as the year subprime mortgages and corporate scandals changed the face of Wall Street. Buried under the weight of the subprime crisis, financial institutions took nearly $800 billion in writedowns and losses. The value of stocks worldwide plummeted by more than $30 trillion. Goliath investment houses like Bear Stearns fell apart. State, municipal and corporate pension funds reported massive losses from investments tied to faulty valuation models and high-risk mortgage-backed securities and their derivative spin-offs, collateralized debt obligations (CDOs).

Then there’s the near financial collapse of mortgage giants Fannie Mae and Freddie Mac and American Insurance Group (AIG), which required a financial intervention courtesy of the U.S. government. Lehman Brothers, the fourth-largest investment bank in the United States, filed for bankruptcy protection in 2008. Washington Mutual and IndyMac, along with some 20 other banks were forced to close their doors. Government bailouts reached an astronomical $9 trillion. And as a final nod to 2008, investors lost some $50 billion in a Ponzi scheme orchestrated by the former Nasdaq chairman, Bernard (Bernie) Madoff.

For investors, 2008 is the year that went from bad to worse. It began with the collapse of the auction-rate securities market in February and continued with credit default swaps and structured investment products. For the first time since the 1930s, the Dow Jones Industrial Average experienced losses of more than 30%, closing the year at 8,776.39. By comparison, the Dow finished out 2007 at 13,264.82. Bank stocks in particular took a beating in 2008, with Bank of America and Citigroup losing nearly 70% of their value. As for shareholders, they saw about $7 trillion of their wealth wiped out.

In the world of ultra-short bond funds, 2008 provided the lesson that ultra short does not translate to “ultra safe.” A number of supposedly safe and conservative ultra-short funds got into trouble in 2008 by investing in risky mortgage-backed securities and collateralized mortgage obligations (CMOs). When losses in those toxic assets began to skyrocket, investors lined up to pull their money out in droves, sparking a wave of fund redemptions.

As a result, several fund managers were forced to liquidate their funds’ assets. State Street Global Advisors’ SSgA Yield Plus Fund began liquidating in May after the fund fell 19%. It turns out more than 50% of the fund’s assets were tied to mortgage-related securities funds. One month later, the Evergreen Ultra-Short Opportunities Fund liquidated, as well, when its assets plunged more than 20% in value. Finally, there is Charles Schwab’s YieldPlus Fund. Marketed to investors as a safe alternative to cash, the fund suffered the most losses of any ultra-short bond fund in 2008, losing more than 40% of its value.

Investors, meanwhile, are suing all three funds, charging that they investments were represented as conservative “cash alternatives” and similar to money-market funds. Far from safe or conservative, the funds were heavily concentrated in risky mortgage and asset-backed securities. And, in the case of Schwab’s YieldPlus Fund, several investors who have filed lawsuits claim various Schwab executives and fund manager Kimon Daifotis committed “acts of gross misconduct” by encouraging investors to hold on to their YieldPlus shares, while simultaneously dumping millions of YieldPlus shares from the portfolios of Schwab’s other mutual funds.

Capping out 2008, of course, is the Bernie Madoff scandal. The disgraced hedge fund manager was arrested Dec. 11 by federal agents on charges of securities fraud for scamming $50 billion from investors. Meanwhile, the Securities and Exchange Commission (SEC), the supposed protector of investors and their investments, apparently turned a blind eye to Madoff’s subterfuge over the years by ignoring red flags that signaled problems with his funds and their “too-good-to-be-true” returns.

For investors, the Madoff affair may well be the final nail in the coffin when it comes to confidence in Wall Street. Already shaken from a year that was punctuated by the subprime crisis and corporate scandals - including the implosion of Bear Stearns, the collapse of the auction rate securities market, the bankruptcy of Lehman Brothers and inept accounting practices by Fannie Mae and Freddie Mac and other institutions - Wall Street has its work cut out in 2009 as it tries to renew investors’ faith once again.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

At one time, Legg Mason’s William H. Miller was known as the king of mutual fund managers. Then, too many bad investments in low-quality mortgages and in stock of troubled companies like Fannie Mae, Freddie Mac and Bear Stearns uniformly swept away Miller’s title. One of the funds hardest hit from Miller’s management decisions is the Legg Mason Value Trust (LMVTX).

Investors have lost nearly 60% of their money this year in the Legg Mason Value Trust, which is now among the worst-performing in its class for the past one-, three-, five- and 10-year periods, according to Morningstar.

Legg Mason launched the Value Trust fund in 1982, followed by an initial public offering one year later. Last year, the fund had $22 billion under management; today, its assets total $4.3 billion.

Problems for Legg Mason first began to surface three years ago, when the company negotiated a swap of its stock brokerage unit to Citigroup in return for taking on the bank’s money-management operations. Since then, however, the Baltimore-based money manager has been plagued with performance issues. The economic downturn, continuing fears over the credit market, downgrades of its senior debt, investor redemptions and takeover speculation all have wreaked havoc on Legg Mason’s stock, which has lost more than 75% of its market value since the beginning of this year.

By comparison, reinvested returns of the Standard & Poor’s 500 Index declined by 40%.

Meanwhile, after three consecutive quarters of losses, Legg Mason announced plans to cut about 8% of its workforce on Dec. 5 in order to lower annual expenses by $120 million.

Looking ahead, more trouble may be in store for Legg Mason. Last month, analysts at Friedman Billings Ramsey downgraded the money manager to a “sell” rating because of fears falling assets could trigger a financing crunch. Moreover, some of Legg Mason’s agreements to shore up poor-performing funds are set to expire soon, which means the company might need to tap its cash in order to buy securities from the funds.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.