Archive for the “Hedge Funds” Category

Ralph R. Cioffi and Matthew Tannin, the two former Bear Stearns executives who managed ill-fated hedge funds that cost investors billions of dollars, are scheduled to go to trial in September. Cioffi and Tannin are accused of deceiving investors about the financial status of the High Grade Structured Credit Strategies Master Fund and the Enhanced Master Fund, which were heavily invested in mortgaged-backed securities and losing substantial amounts of money. Both funds eventually collapsed.

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. 

Pioneer hedge fund investor Sandra Manzke is mad as hell and isn’t going to take it anymore. Last week, the 60-year-old sent a scathing email to some 500 high-net worth individuals, pension-fund managers, colleagues and others on what she says is the outrageous and over-the-top behavior of the $1.5 trillion hedge fund industry.

Manzke, best known for founding Tremont Capital Management in 1985, is up in arms over less-than-savory hedge fund practices, including high fees, limiting or suspending client withdrawals, funds that get their money out ahead of investors and managers who use borrowed money to make trades in some of the most volatile stock and bond markets in recent memory.

Manzke’s solution is to get her peers on board to form a watch-dog group called the Hedge Fund Investors United Forum that would protect the rights of investors.

According to Bloomberg.com, which ran the Nov. 21 story on Manzke and her hedge fund reform mission, losses for hedge funds are at record highs this year. More than 75 funds have liquidated, suspended client withdrawals or limited redemptions; others have placed some securities in a separate account so they can’t be sold.

Meanwhile, in between running MAXAM Capital Management LLC, Manzke reportedly is putting together a list of various hedge fund managers that have fallen from grace lately.

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 seems Wall Street’s leading investment banks - Lehman Brothers, Citigroup, Morgan Stanley, and Merrill Lynch - are unable to escape the glare of scrutiny over questionable business practices these days. Now a U.S. Senate committee investigation reveals that several top firms are raking in millions of dollars in profits by using complex derivatives and stock schemes to help foreign hedge funds illegally avoid paying billions in U.S. taxes.

In its 77-page report, to be released Sept. 11, the Senate Permanent Subcommittee on Investigations calls the tax-avoidance schemes another example of a “privileged few” benefiting at the expense of millions of American taxpayers who are left to shoulder a disproportionate share of the tax base.

The report says that $100 billion a year is lost to offshore tax abuses.The report names several hedge funds involved in the schemes, including Moore Capital, Highbridge and Maverick Capital.

Foreigners who invest in the United States are exempt from many U.S. taxes - they don’t pay taxes on interest earned on money deposited in a U.S. bank, nor do they pay taxes on capital gains. However, if they invest in a U.S. company and the stock pays a dividend, U.S. law requires them to pay a tax on the dividend. Dividends sent abroad are supposed to be taxed at a rate of 30% in most countries.

In reality, however, it’s a different story, and many non-U.S. stockholders never pay the dividend taxes that they owe. According to the Subcommittee’s report, the fault lies with U.S. financial institutions.

According to the report, each of the institutions investigated developed and marketed “dividend-dodging products” that disguised dividend payments to clients as nontaxable ones. The products involved complex equity swaps or loans that the banks described as offering a “dividend enhancement,” “yield enhancement,” or “dividend uplift.”

For the investment firms, the practice is a profitable one.

The Senate investigation shows that from 2000-2007 Morgan Stanley helped clients dodge payments of U.S. dividend taxes of more than $300 million. Lehman Brothers estimated that in one year alone, it helped clients avoid U.S. dividend taxes amounting to $115 million. From 2004 to 2007, UBS enabled clients to dodge $62 million in dividend taxes.

As was seen in the FBI’s investigation of Bear Stearns’ executives Matthew Tannin and Ralph Cioffi, as well as in several other recent Wall Street scandals, emails are at the center of the Senate Committee’s probe over dividend tax dodging.

As reported Sept. 11 in The New York Times, the Committee’s report cites an internal e-mail message in which an employee from Lehman Brothers refers to Microsoft’s announcement of a special dividend as “the cash register is opening!” A senior Lehman official is then quoted as saying, “Outstanding. Let’s drain every last penny out of this [market] opportunity.”

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.

Compatibility has not been Citigroup’s strong suit this year when it comes to hedge funds. After a run of previous failures, the bank is now closing the $400 million Tribeca Convertible LP arbitrage fund. It is the final chapter in Citigroup’s plan to shut down its Tribeca Global Investments hedge fund.

Investor redemptions are thought to be the reason behind the fund’s closing. According to an Aug. 4 article on Bloomberg.com, Tribeca Convertible was down less 5% this year, after rising 5% in 2007 and 20% in 2006.

Tribeca Global Investments was created in 2004 as Citigroup’s flagship hedge fund group. At the time, the fund intended to raise $20 billion. Instead, it attracted $2 billion.

Cititgroup’s latest hedge fund troubles have become something of a pattern for the nation’s largest bank and its asset management business. In February, Citigroup suspended redemptions in CSO Partners, after investors tried to withdraw more than 30% of the fund’s $500 million in assets. In March, it was the bank’s Falcon Strategies funds to encounter problems. Despite attempts to stabilize the fund with more than $600 million, Falcon closed. And in June, Citigroup shut down Old Lane Partners after investors redeemed more than $200 million. Citigroup’s CEO Vikram Pandit was one of the founders of Old Lane Partners, before selling it to the bank in 2007 for $800 million.

Volatile market conditions and credit concerns have created hard times overall for the hedge fund industry. In 2008, new hedge fund launches are half of what they were only a year ago. Meanwhile, liquidations continue to rise.

Several of the hedge funds closed by Citigroup initially had been pitched to investors as fixed income products - safe and secure investments designed to provide higher yields. As in the case of the ASTA and MAT funds, that wasn’t the reality. Instead, the funds were highly leveraged municipal bond funds whose assets had been invested in risky and speculative subprime mortgages. Even as the ASTA fund and MAT fund began to plummet in value, the funds’ managers assured brokers and clients alike that they would rebound. In the end, the funds lost up to 90% of their original value.

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.

Citigroup hedge fund investors who put their faith - and dollars - in the ASTA Fund and MAT Fund are now thinking of a Citigroup lawsuit. Marketed as a conservative investment, the Citigroup hedge funds ultimately plummeted in value. As compensation for their ASTA Fund and MAT Fund investment, the company offered a “settlement” to investors - a payout worth less than one half of the initial Citigroup investment. There was one catch: Investors had to forfeit all rights of bringing legal action for their Citigroup problems later down the road.

The Citigroup ASTA Fund and MAT Fund were highly leveraged municipal bond funds that borrowed approximately $8 for every $1 raised. By March, Citigroup problems - and its losses - became evident: Both funds were worth approximately 10 percent of their original value. Despite the obvious, hedge fund investors were repeatedly told the situation would rebound.

That wasn’t the case. Even after Citigroup plunked more than $660 million into the ASTA Fund and MAT Fund, they continued to go downhill.

Citigroup first offered the ASTA Fund and MAT Fund in 2002 to Smith Barney brokerage clients and private bank customers. Their strategy worked something like this: Trusts run by Citigroup and other financial institutions borrowed money by issuing tax-exempt commercial paper, then used that cash to buy municipal bonds with slightly higher yields and kept the difference.

The trusts then hedged against interest rate changes by basically reversing that trade, using taxable securities. To ramp up returns, the trust piled on pools of leverage, with Citigroup buying the riskiest pieces of the bonds issued.

Investors in the ASTA Fund and MAT Fund thought they were putting their money into a conservative investment - an investment where losses were not to exceed 5%. Instead, the funds’ management invested their assets in the most risky and speculative of investments. When it became clear the hedge funds were in trouble, Citigroup assured both brokers and investors it was only a matter of time before they would bounce back.

More than likely Citigroup will have the chance to tell its story again - this time in court. The company is facing a myriad of lawsuits over the ASTA Fund and MAT Fund, with plaintiffs charging Citigroup management of misrepresenting the funds and putting their investments at grave risk.

The bottom line: The ASTA Fund and MAT Fund are a prime example of what happens when a company fails to exercise risk management - and now investors, once again, are paying the price.

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.

When the Federal Reserve orchestrated a bail-out plan for investment banking giant Bear Stearns back in March and followed it with emergency funding to keep the financial markets up and running, the intervention was thought to be a temporary solution at best.

Now, some policymakers fear the Fed’s actions may be seen as enabling, and that Wall Street investment firms will become increasingly dependent on the emergency loans as a permanent source of future funding.

Apparently that’s what Assistant U.S. Treasury Secretary Anthony Ryan fears. As reported June 24 on Bloomberg.com, Ryan believes that once credit markets stabilize, the Treasury should put an end to the supply of funding for Wall Street.

“When they [the Federal Reserve] put these lending facilities in place back in March, they said they were going to be temporary,” Ryan said in the article. “We don’t want to encourage the dependence upon the Federal Reserve as a backstop.

“Regulators must balance the need for market stability with concerns about the likelihood of increased moral hazard. While firm failures are painful, as a policy matter, we must be in a place where firms are allowed to fail,” he added.

The Primary Dealer Credit Facility was created by the Federal Reserve on March 16 as a means to bolster market liquidity and keep the financial markets functioning properly. At the time the Fed announced the lending program, the idea was for it to operate about six months, offering loans for as long as 90 days, rather than 30 days under the regular discount window.

Many financial experts have cautioned that providing such loans in the first place only increases the chances for future reckless lending, as well as another credit crisis.

Since the fallout of the subprime mortgage crisis, investment banks and securities firms have taken writedowns and credit losses totaling approximately $400 billion.

Meanwhile, while the Federal Reserve’s emergency funding plan may have temporarily helped restore some investor confidence in financial markets, it also sends a very ambiguous message to Wall Street - one in which there appears to be little emphasis on risk management. And now more than ever, sound risk management practices are sorely needed.

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.

Some people have to learn a lesson the hard way. For Ralph Cioffi and Matthew Tannin, the lesson was that Big Brother is indeed watching, as emails from the former Bear Stearns hedge fund managers helped lead to their arrest last week on charges of intentionally deceiving thousands of investors about the financial health of two hedge funds.

The criminal charges are the first against Wall Street executives related to the subprime meltdown and could potentially foreshadow what many believe is just the beginning of a long list of prosecutions to follow.

In the Bear Stearns case, Cioffi and Tannin are accused of defrauding or misleading investors in the Bear Stearns High Grade and Enhanced Hedge Funds - actions which ultimately shut down the funds and cost investors more than $1 billion in losses. The collapse of the two hedge funds is often referred to as the event responsible for igniting the subprime mortgage debacle - and one that played a major role in the credit crunch that continues to hammer the nation’s economy today.

Highlights of the events leading up to the June 19 arrest of Cioffi and Tannin are taken from a copy of the 28-page indictment filed June 18, 2008, in the U.S. District Court of New York.

• October 2003. The Bear Stearns High Grade Structured Credit Strategies Master Fund Ltd. is opened to investors and supervised by Cioffi. Cioffi and others market the fund to investors as only slightly riskier than a money market fund.

• August 2006. The High Grade Fund’s performance begins to decline. Fearing future redemptions by investors, Cioffi and Tannin open the Bear Stearns High Grade Structured Credit Strategies Enhanced Master Fund Ltd, which invests primarily in collateralized debt obligations (CDOs). Both men tell investors that the Enhanced Fund will generate greater profits than the High Grade Fund, but that it would carry only limited additional risk.

• March 2, 2007. Cioffi, Tannin and two unnamed colleagues meet to discuss the financial state of the hedge funds. Cioffi states the funds narrowly “averted disaster” the previous month. Before the meeting concludes, Cioffi directs those present not to talk about the funds’ difficulties with others, including other members of the funds’ team. Later that evening, Cioffi dines with friends and family and makes a vodka toast to celebrate surviving the month.

• March 3, 2007. An email from Cioffi to Tannin states: “The worry for me is that subprime losses will be far worse than anything people have modeled.”

• March 7, 2007. At 6:12 a.m., Cioffi writes in an email to a Bear Stearns broker that the funds have an “awesome opportunity.”

• March 15, 2007. Tannin tells an investor that, “we are seeing opportunities now and are excited about what is possible. I am adding capital to the Fund. If you guys are in a position to do the same, I think this is a good opportunity.”

• March 18, 2007. At 10:22 p.m., Tannin writes in an email to an investor that he and Cioffi each have about, “40% of our non-real estate net worth in the fund. I am adding more this month.”

• March 23, 2007. Cioffi transfers $2 million of his $6 million investment in the Enhanced Fund to a more profitable Bear Stearns hedge fund, Structured Risk Partners, for which he has supervisory oversight. He fails to inform investors who had repeatedly asked about his personal investment in the funds about the transaction.

• March 27, 2007. In an email message to a member of the Bear Stearns portfolio management team, Tannin expresses satisfaction at his success in convincing investors to add more capital to the funds: He writes: “Believe it or not, I’ve been able to convince people to add more money. . .”

• April 18, 2007. One (known as Major Investor 1 in the indictment documents) of the three largest investors in the funds informs Cioffi that he is considering withdrawing approximately $57 million. Cioffi proceeds to tell this investor that he and the other portfolio managers have $8 million invested in the funds and that this represents one-third of their liquid net worth. Cioffi does not inform Major Investor 1 of his recent withdrawal of $2 million of his approximately $6 million investment from the Enhanced Fund.

• April 19, 2007. Major Investor 1 informs Bear Stearns that he wishes to redeem the $57 million investment. Both Cioffi and Tannin are aware of Major Investor 1’s intention.

• April 22, 2007. Tannin communicates to Cioffi via e-mail that he fears the market for the bond securities they invested in is now “toast.” Tannin suggests shutting the funds.

• April 24, 2007. Tannin and Cioffi do not disclose the gravity of the funds’ problems to investors. In a meeting with senior Bear Stearns personnel, the men say they are “confident” the funds are in good shape and would continue to be successful.

• April 25, 2007. Tannin is upbeat on a conference call with investors regarding the financial health of the funds, telling them there was no basis for believing “this is one big disaster.” On that call, Cioffi does not reference the $67 million in fund redemptions for April and May 2007. Instead, he states that June redemptions were only a “couple million” when, in fact, they totaled $47 million, including part of the $57 million redemption by an unnamed major investor.

• May 3, 2007. Tannin informs a lender that the funds anticipated no large redemptions. In reality, between March 1 and May 3, 13 investors, including two of the largest investors in the funds and Cioffi himself, had requested redemptions.

• June 7, 2007. Investors are told they can no longer redeem their investments in the Enhanced Fund and High Grade funds, regardless of whether or not they had already submitted redemption requests.

• June 9, 2007. The funds’ collapse is imminent. Cioffi states in an email: “If I can’t [turn the funds around], I’ve effectively washed a 30-year career down the drain.”

• June 11, 2007. Both funds collapse, losing 100% of their respective values, resulting in a total investor loss of $1.4 billion.

• June 17, 2007. Investors are provided the final April 2007 return of -5.09% for the High Grade Fund and -18.97% for the Enhanced Fund.

• June 19, 2008. At 7 a.m., Ralph Cioffi, 52, and Matthew Tannin, 46, are arrested at their respective residences by the Federal Bureau of Investigations (FBI), and charged with conspiracy, securities fraud and wire fraud. Cioffi also faces charges of insider trading. If found guilty, both men could be sentenced up to 20 years in prison.

• June 19, Afternoon. Both men appear in handcuffs in a Brooklyn federal court for their arraignment and plead not guilty to all charges. They are released on bond. Cioffi’s bail is set at $4 million, Tannin’s at $1.5 million. The men used their homes and other property as collateral.

• July 18, 2008. Cioffi and Tannin are due back in court.

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.

All good things must come to an end - and that’s exactly what former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin found out as they were arrested at their homes and taken into custody in the early morning hours of June 18. The two men are being charged with misleading investors about risky subprime investments when the two hedge funds they helped run collapsed.

The arrest of Cioffi and Tannin is the first of what many predict will be a long list of arrests to follow in a federal investigation into possible securities fraud by Wall Street investment banks. For more than a year, the Securities & Exchange Commission (SEC) and the Federal Bureau of Investigations (FBI) have been looking into the actions of Wall Street banks and securities firms to uncover evidence showing investors had been intentionally misled and misinformed about the value of mortgage-backed securities.

To date, investments in subprime loans and securities have caused nearly $400 billion in losses.

The arrest of Cioffi and Tannin apparently centered on an e-mail allegedly sent by the two former hedge fund managers, which intimated their hedge funds were in trouble. Only four days prior, the men had informed investors that their holdings were in good financial shape.

As reported in a June 19 article in the Wall Street Journal, in the email Tannin allegedly sent to Cioffi, he expressed fears that the market for bond securities they had invested in was “toast.” He then suggested shutting the funds.

As it turns out, the Bear Stearns hedge funds Cioffi and Tannin managed had invested the majority of their assets in subprime mortgage-related securities. It soon became evident their bets were severely misplaced when prices for collateralized-debt obligations tied to mortgage loans plummeted amid the subprime crisis. In June 2007, despite “positive” reviews to investors, the hedge funds managed by Cioffi and Tannin failed.

The collapse of the two Bear Stearns hedge funds signaled one of the first warning signs that the Wall Street investment giant - once the fifth-largest investment firm in the nation - was headed for serious trouble. Last month, Bear Stearns shareholders approved a $2.2 billion buyout at about $10 a share by JPMorgan Chase.

Meanwhile, legal woes for Cioffi and Tannin are just getting started. Both men already have been named in lawsuits brought last year by hedge fund investors, who charge they were purposely misled about the financial condition of the Bear Stearns hedge funds.

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.Â

Following a year-long investigation, it appears things have come to a head for former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin. Federal prosecutors are expected to charge the two men with securities fraud this week in connection with the High Grade Strategy and Enhanced High Grade hedge funds.

As reported June 16 in the Wall Street Journal, it’s unknown whether broader charges will be filed against Bear Stearns, which was acquired by J.P. Morgan Chase last month, or its senior management.

Key to the indictment against Cioffi and Tannin is whether the two hedge funds managers purposefully misled investors about the financial state of the High Grade Strategy and Enhanced High Grade funds. In April, Cioffi and Tannin reportedly were singing the funds’ praises, while at the same time telling colleagues and others via email and telephone conversations of potential problems with the funds.

In July 2007, both hedge funds filed for bankruptcy protection.

The resulting collapse of the High Grade Strategy and Enhanced High Grade hedge funds has wreaked havoc on investors - to the tune of $1.6 billion. The funds’ collapse also has been cited as a major contributing factor in instigating the credit crisis that ignited last year.

Equally important, the funds’ demise shed new light on the inaccuracy of the valuations that Wall Street placed on their holdings of mortgage securities. To date, according to the Wall Street Journal article, financial firms worldwide have written down an astronomical $387 billion in mortgage and other holdings.

Meanwhile, if Ciofii and Tannin are, in fact, indicted, it would be the first criminal charges against Wall Street executives since troubles erupted in the financial world last year. And, as the Wall Street article intimated, should the indictments come to fruition as expected, it may very well foreshadow what’s to come for countless other Wall Street firms under investigation for their alleged wrongdoings related to the mortgage-market debacle.

Either way, this latest news is yet another reminder that Wall Street - where investor confidence is everything - has indeed lost touch with the ethos of those it serves. For Bear Stearns, once considered one of the most respected firms on Wall Street, there is no chance of making a comeback. Pushed to the brink of bankruptcy, J.P. Morgan completed the acquisition of the company on May 30, 2008.

Only time will tell how well other Wall Street firms heed the lesson of Bear Stearns.

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.Â

Ongoing turmoil in the credit markets has unleashed a flurry of financial thunderstorms on many Wall Street investment banks involved in hedge funds, producing staggering losses and forcing once-profitable funds to be shut down.

Citigroup’s Old Lane Partners is one of the hedge funds unable to weather the current storm.

As reported June 12 in the Wall Street Journal, Citigroup plans to close Old Lane Partners, which was co-founded by Citigroup’s new CEO Vikram Pandit. The news comes only 11 months after Citigroup bought the fund’s management company for more than $800 million.

Reportedly, Citigroup will purchase most of Old Lane’s assets, and investors will be able to begin withdrawing their investments starting July 31. The shut down of Old Lane marks at least the fourth failure this year for Citigroup’s hedge-fund management unit.Following the collapse of the subprime mortgage market last summer, news has been bleak for hedge funds. According to data from Hedge Fund Research, the first three months of 2008 posted the worst hedge fund performances in almost six years. More than a dozen hedge funds shut down, froze redemptions or sought outside capital.

Like other hedge funds, problems for Old Lane Partners came to a head as the credit markets seized up and seemingly safe top-rated investments, including mortgage investments, plummeted in value. Citigroup, Bear Stearns Cos., Goldman Sachs and UBS all have since booked billions of dollars in losses and write downs.

Moving forward, investor anxiety over the future state of hedge funds may be shifting into high gear. According to a June 12 article in the Wall Street Journal, hedge funds are bracing for a wave of investor withdrawals at the end of this month. Reportedly, redemption requests are piling up at even the most established hedge funds, reaching levels that many funds haven’t seen in decades.

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.Â