Archive for the “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.

Hedge funds have become a hotbed of controversy lately, with fund managers facing state and federal investigations, lawsuits and arbitration claims over disclosure issues and charges of misleading investors. Case in point: Citigroup’s ASTA/MAT hedge funds. The failure of ASTA/MAT, which consists of six hedge funds that were sold under the brand names of ASTA and MAT, has resulted in a slew of complaints from investors who say the funds not only were misrepresented, but also that Citigroup raked in millions of dollars in fees and unexplained commissions in the process.

The losses experienced by ASTA/MAT and the lawsuits that have followed are a black eye for Citigroup. According to investors, Citigroup billed MAT and ASTA as safe, conservative investments - alternatives to traditional bond funds that were designed to produce tax-advantages and reliable cash flows. Moreover, investors would be exposed to minimal risks.

In reality, Citigroup took on a risky investing strategy known as municipal bond arbitrage, which involved borrowing approximately $8 for every $1 raised. When the credit and bond markets began to falter in the summer of 2007, and continue their descent in 2008, ASTA/MAT responded accordingly. Ultimately, that mayhem and volatility caused the funds to lose more than 90% of their value.

Despite the financial bleeding, however, Citigroup management continued to push ASTA/MAT to investors. The reason may have had something to do with the millions of dollars in exorbitant fees that Citigroup and its brokers collected.

Citigroup later offered to compensate investors for their losses in ASTA/MAT. The plan, which entailed refunding investors only 45% to 55% of their portfolio’s value, required investors to forego any future litigation against Citigroup for their financial losses in the funds.

Understandably, many investors said a resounding “no” to Citigroup’s settlement offer. Instead, they filed lawsuits to recover their losses, charging Citigroup of misrepresenting ASTA/MAT as a relatively safe, low-volatility bond fund investments when in actuality the funds were highly leveraged and subject to market volatility.

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. 

It’s become a familiar scene across the country: Public pension funds gambled billions of dollars of their employees’ retirement money in the high stakes world of hedge funds. Now, as pension fund managers discover that their hedge funds investments have delivered far less than what they expected, many people are left to wonder if their golden years will instead be spent logging more time in the workforce.

Long before Bernard Madoff made front page news for his $50 billion hedge fund Ponzi fraud, hedge funds were garnering the attention of state and federal regulators for their lack of transparency and opaque oversight standards.

Despite this veil of secrecy, public pension funds nonetheless gravitated to hedge funds in droves, putting their money into everything from real estate to private equity funds. In 2005, 13% of all public pension funds invested in hedge funds, according to an April 15 article in the New York Times. Three years later, the percentage had climbed to 40%.

The apparent infatuation of public pensions and hedge funds may be changing, however. Faced with the grim reality of massive losses on their hedge fund investments, more pension funds are scaling back or, at the very least, trying to change the terms of their hedge fund investments.

The California Public Employees’ Retirement System (Calpers) is a prime example. As reported in the New York Times article, the nation’s largest public pension fund is trying to reduce hedge fund fees and alter the terms of its investments to hedge funds. The decision comes after Calpers saw its investments in hedge funds fall from $7.6 billion to $5.9 billion.

Moreover, the annual returns Calpers has achieved since it began investing in hedge funds in 2002 have been modest at best: only a 3.5% annual rate of return. The percentage is far, far less than what it initially had been promised by Caplers’ hedge fund managers, according to the New York Times story.

As for hedge funds, many are in no position to question the demands of investors like Calpers. In the past year, hedge fund assets have collectively fallen by nearly 40% to $1.2 trillion due to record losses and redemption requests. Adding to the industry’s blight are state and federal investigations into whether certain hedge funds made illegal payments to intermediaries in order to gain access to state public pension funds.

Among the hedge firms under investigation by the Securities and Exchange Commission (SEC) and New York Attorney Andrew Cuomo as having paid fees to garner business from the New York State Common Retirement Fund are the Carlyle Group, Odyssey Investment Partners, and HFV Asset Management LP. On April 15, Barrett Wissman, an executive at HFV, pleaded guilty to securities fraud and agreed to a $12 million settlement as part of the investigation.

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. 

In what appears to be a page right out of the Bernie Madoff book on hedge fund fraud, money managers Paul Greenwood and Stephen Walsh are charged with bilking $550 million out of investors, state and city pension funds and higher education institutions in order to fund elaborate personal purchases that included multimillion-dollar mansions, rare books and 1,350 Steiff teddy bears.

Like Madoff, Greenwood and Walsh had been revered on Wall Street - their supposed investment prowess legendary among clients and colleagues across the country. For years, the two men succeeded in living up to the hype with claims of outperforming the Standard & Poor’s 500 Index. Their bragging came to an abrupt halt on Feb. 25, however, when FBI agents arrested them on conspiracy, securities and wire fraud charges.

The Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission brought separate civil charges against Greenwood and Walsh. In its 22-page complaint, the CFTC charged the two men of fraudulently soliciting some $1.3 billion from investors over the past decade.

Greenwood, 61, and Walsh, 64, are principals of the Greenwich, Conn.-based hedge fund WG Trading Co. LP and Westridge Capital Management in Santa Barbara, Calif. According to SEC documents, the duo conned investors with an elaborate hedge fund investing strategy that involved buying and selling equity futures and enhanced equity index arbitrage trading. 

As part of the scam, investors were told that their money was going toward “conservative” investments. Instead, court documents say the funds were used as a personal piggy bank by Greenwood and Walsh. Included in their buys: $160 million for personal expenses, $80,000 for a Steiff teddy bear (Greenwood is said to own the world’s largest collection), a $10 million property in North Salem, a $4 million home on Long Island’s Gold Coast and a 54-acre riding school and horse farm once belonging to the now-deceased actor Paul Newman.

A number of pension funds and universities are included among those who lost money to Greenwood and Walsh. The Sacramento County Employees’ Retirement System in California reportedly invested nearly $90 million with Westridge Capital Management. The Iowa Public Employee’s Retirement System invested nearly $340 million, and the University of Pittsburgh and Carnegie Mellon University collectively invested $114 million.

According to court documents, there may be as many as 16 universities or public-employee pension funds that used Westridge Capital Management as their investment advisor.

Federal authorities believe the swindle by Greenwood and Walsh could date as far back as 1996. The two men were caught only this month during a routine audit investigation by the National Futures Association. The association found $812 million in assets on the balance sheets of the pair’s hedge fund, with $794 million in promissory notes due from Greenwood and Walsh.

If convicted, Greenwood and Walsh could spend up to 20 years in prison on each of the fraud counts and five years for conspiracy. They currently remain out of jail on a $7 million bond.

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. 

It used to be common practice for hedge funds like 1861 Capital Management, Citigroup’s ASTA/MAT and Stone & Youngberg Municipal Advantage Fund to tout the promise that first built the hedge fund industry: to produce profits even in tough markets. Now it’s a different story altogether. The hype is faded, and the credit crunch has caused more banks to pull credit lines from hedge funds and investors to shun this once-popular-but-secretive corner of the investing world.

For hedge funds that invest in the $2.6 trillion municipal bond market, troubles are even more pronounced. As reported March 1, 2008, by the Wall Street Journal, turmoil in the municipal-bond market has forced a number of hedge funds to unwind complicated bets and in the process unload billions of dollars worth of securities. Among those hedge funds: New York-based 1861 Capital Management.

Municipal bond arbitrage is considered a complicated, risky investing strategy that involves trades of municipal bonds, short-term notes, and interest-rate derivatives. In recent years, a growing number of hedge funds, including 1861 Capital Management, began to employ municipal arbitrage, buying long-term municipal bonds that had slightly higher yields and pocketing the difference. The funds then hedged against large fluctuations in interest rates by essentially reversing that trade, using taxable securities. 

Municipal bond arbitrage also entails additional risk because in order to bolster returns, hedge funds must pile on the leverage.

Signs of trouble first appeared at the beginning of 2008, when municipal bond yields became hammered from the downturn in the markets. As a result, many hedge funds suddenly found themselves forced to liquidate their leveraged positions. 

It’s these two facts - risk and leverage - that have become a bone of contention for many investors in municipal arbitrage hedge funds. As reported in a January 2009 study from the Securities Litigation and Consulting Group (SLCG) on the recent failure of leveraged municipal bond hedge funds, some 36 hedge funds - 1861 Capital Management among them - were marketed and sold to investors as “high yield, low-risk alternatives” to traditional municipal bond funds.

In reality, nothing could have been further from the truth. All of the hedge funds featured in SLCG’s study contained considerably more risk than investors ever realized. They also produced significantly lower-than-expected returns. In the end, investors suffered to the tune of billions of dollars in losses.

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.