Awaiting the Truth about Ralph Cioffi's Departure

Ralph Cioffi, the head fund manager in charge of the two collapsed Bear Stearns hedge funds, has quietly left the firm. While there are rumors that he might be setting up another hedge fund, this would be shocking given the carnage at Bear Stearns which is still being cleaned up. Well, you know what they say about doubling down on a bad bet.

A more likely reason for Cioffi's departure might have to do with the report that prosecutors are looking into Cioffi's withdrawal of some $2 million he personally invested in the funds while he was still touting them to investors. Two failed funds would be the least of Cioffi's worries if prosecutors decide to pursue a case of insider trading or some other wrongdoing.

The real interesting tidbit of Cioffi's departure will be the U-5 form that Bear Stearns is required by law to file within 30 days of his leaving, disclosing the reasons for his departure. Wall Street firms often post disparaging comments on a departing employee's U-5 in order to make it difficult to take a book of business or gain future employment. Regretfully, Wall Street believes it can now make reckless claims with immunity thanks to a New York state court ruling in June saying that a brokerage firm cannot be sued for defamation because of what it states on a broker's U-5 form.

But with regulators, prosecutors, liquidators, and investor attorneys, including myself, aggressively scrutinizing the collapse of Mr. Cioffi's funds, Bear naturally wants to avoid writing negative comments about him as that could undermine the firm's stated defense that no wrongdoing ever occurred. Still, Bear is obligated to be truthful in its U-5 disclosures, so if Cioffi's departure was involuntary, or related to regulatory or legal issues, the firm has to disclose that.

With so much on the line, you can also bet FINRA is also keeping a close watch on what Bear Stearns has to say about Cioffi. The Form U-5 is a critical part of FINRA's much touted "Broker Check" system, which has been advertised everywhere from CNBC to professional football games. A chink in the U-5 could mean a loophole in the whole "Broker Check" system.

Rest assured, I'll be reporting on Cioffi's U-5 disclosure as soon as it is filed, so let the countdown begin.

Bear Stearns Hedge Fund Insider Trading Inquiry

The inquiry by Federal criminal prosecutors into whether insiders withdrew money from the collapsed Bear Stearns hedge funds was reported nationally this morning. The Feds are looking into the actions of the fund’s head manager Ralph Cioffi. People close to the investigation are saying he moved nearly $2 million from the funds just weeks before they imploded into insolvency.

Also investigation insiders are saying that Cioffi was touting the funds to investors and prospective investors while at the same time pulling his own money out. If the allegations are indeed true, then this is a situation reminiscent of Sam Waxal, the disgraced former CEO of Imclone, whose actions led to his imprisonment of seven years and Martha Stewart’s conviction and incarceration.

Insiders should never be granted preferential treatment and if the Feds’ inquiry uncovers evidence it could certainly help my clients and other investors who have filed claims against Bear Stearns.

The report of potential insider trading at Bear Stearns ironically was followed by a report from the General Accounting Office that criticized the SEC and FINRA for their record on insider trading. Under such pressure, you can be sure regulators and investigators will take the Bear Stearns inquiry very seriously.

Subprime Arbitration Claims Ring Familiar: Welcome Back Blodget?

Sans research analysts secretly trashing the stocks they cover and it's the year 2000 all over again. Dow Jones Newswire reports on some of our clients whose financial advisors allegedly placed their savings into unsuitable investments tied to the speculative subprime loan market. Here's an excerpt profiling one of Zamansky & Associates' clients:


In his claim against Oppenheimer, investor Kevin Haynes, a freelance writer and editor, argues that his broker, Alvin Corwin, shifted him out of blue-chip stocks and over-aggressively concentrated his portfolio in American Home Mortgage (AHMIQ), a mortgage lender that ultimately filed for bankruptcy protection in August. Although it wasn't a "subprime" lender, American Home Mortgage offered Alt-A mortgages - mortgages offered to more creditworthy borrowers than subprime loans, but that often have adjustable rates and sometimes require little or no documentation.


When Corwin would recommend buying more shares in American Home Mortgage, Haynes, 50 years old, said he would ask "Aren't we putting too many eggs in one basket?" Haynes recalled. "He said, 'No, this is a smart play...You've got to do this.'"


As the subprime crisis widened in June 2007, Haynes, who lives in Manhattan's Financial District, met with Corwin and told him he wanted to get out of American Home and that he couldn't tolerate a large loss from such a substantial holding, the claim said. Corwin adamantly advised Haynes to keep holding onto the stock, the claim says, and Haynes did. Shortly after, the claim says, Haynes' shares dropped to $1 each and American Home filed for bankruptcy protection.


Another one of our clients was profiled in the article as well. This demonstrates a distressingly similar trend reminiscent of the dot-com bust, right down to a broker insisting, “Who ever lost money in real estate?"


This is likely only the tip of the iceberg as I've already been approached by other investors with similar cases.

The Bear Stearns/KPMG Whitewash Job

I naturally attended a meeting in Wilmington Delaware today with KPMG on behalf of clients that invested in the failed Bear Stearns High Grade Structured Credit Strategies Fund. KPMG has been hired by Bear Stearns Asset Management (BSAM) to investigate the collapse and liquidate what's left of the failed financial carcass.

The so-called investigation gives me great pause for concern. First, it is BSAM, the subject of investigation, who is paying for it. Second, BSAM has paid KPMG $500,000, which KPMG believes may only be enough to produce a "preliminary report with summary findings." Knowing a big four accounting firm, this will barely cover their photocopying charges.

Surprisingly, KPMG likely won't be producing documents to investors and may only release their "summary findings."

In other words, investors will have to simply trust KPMG, who are ultimately accountable to the firm that burned them in the first place.

Rest assured, Bear Stearns' management isn't sweating KPMG's report.

Paulson's Sub Prime Plan: See You in Court?

U.S. Secretary of the Treasury Henry Paulson is arguing in favor of the administration's plans for the subprime loan crisis. Two sentences from his recent Wall Street Journal op-ed in particular struck a cord with me:

By convening a large group of servicers and mortgage investors, we facilitated their work to improve their outreach and develop an industry-wide, streamlined response to struggling borrowers. Because these industry standards are the product of investor and servicer discussions, the risk of litigation should be manageable.

While many of the provisions in the plan are admirable and the overall goal of keeping Americans in their homes is something we are all striving for, I must take issue with Paulson's statement when it comes to the manageability of litigation. Put another way by Christopher Meyer, head of the Milstein Center for Real Estate at Columbia University's business school, "Everybody is going to end up suing everybody."

Investors in particular seem to be getting the short end of the stick, specifically with respect to the freezing of adjustable rate mortgages set to adjust higher. Pension fund managers, plan sponsors, hedge funds and even institutional individuals have significant investments in collateralized debt obligations (CDO) or related investments tied to subprime loans. The rate of return for many is tied to adjustable rate mortgages, which were supposed to increase as stipulated in the mortgage contract.

It's very simple: if an investor buys a security that is suppose to generate a five percent return, then if it's going to be changed, either the buyer needs to sign off or they need to be compensated for the reduction. In my mind, Paulson's plan is tantamount to a bail out of Wall Street. Wall Street contributed greatly to the housing bubble by packaging and selling toxic subprime loans to investors perpetuating their use even further, therefore Wall Street should bear the brunt of the losses due to contract renegotiations, not the investors themselves.

SEC, Spitzer: Swing and a Miss at Bear Stearns

Every year in New York around this time it's tradition that the ball gets dropped. The problem is this year it has nothing to do with New Year's Eve and Times Square. Today's Wall Street Journal revealed that the S.E.C. and former New York attorney general Elliot Spitzer dropped enforcement cases pertaining to whether Bear Stearns improperly valued mortgage backed securities and in doing so, harmed investors. The investigations would almost certainly have stemmed the tide of valuation inflation currently plaguing Wall Street and protected the myriad hedge funds, institutional investors and high net worth individuals who bought the poisonous debt. Translation: They Dropped the Ball.

Two cases in particular were investigated. In one case an SEC investigator went so far as to recommend a large civil enforcement penalty against Bear Stearns. In the other Bear Stearns allegedly sold bonds it priced at 90 cents on the dollar but after it unloading them, re-priced the value of the same bonds at 30 cents on the dollar before agreeing to purchase them back. Both cases were dropped and there was no comment as to why.

The dropped investigations highlight the rampant conflicts of interest and potential for fraud between Bear Stearns and its now collapsed internal hedge funds raised in the arbitration case we filed on behalf of the investors in the hedge funds. Claimants allege that Bear Stearns was moving toxic low quality collateralized debt obligations over to the fund at inflated market values. In essence, it's alleged that among other things, Bear Stearns was artificially creating a market for this debt by using dubious "mark to model" techniques and questionable transfers. Bear Stearns will eventually have to explain how it valued these transactions.

By the same token, the regulatory community must answer for why their leadership was asleep at the wheel. Poor leadership, in fact, is one reason Wall Street is in crisis to begin with. Bear Stearns execs reward the rank and file through end of the year performance bonuses and according to the Wall Street Journal story "traders long have had a motive to inflate the value of securities because their bonuses often are tied to them."

Without any downward pressure from regulators and a culture of greed/eat what you kill encouraged by Wall Street, is any wonder that things got so far out of control?

Ben Stein's Goldman Sachs Column: Just the Facts

By now, the financial blogosphere is teaming with reactions to Ben Stein's column in Sunday's New York Times about potential conflicts at Goldman Sachs related to its short positions in the collateralized mortgage obligation (CMO) sector. Most of the comments have dissected his presumptions that Goldman Sachs is an underground imperial network, ala the Russian KGB, and that research circulated by one of its chief economist, Jan Hatzius, is nothing short of "lazy" and even possibly libelous.

As an attorney, I stick to the facts and then analyze based more than 25 + years of Wall Street litigation experience. Based on the facts, I'm firmly in Stein's camp.

• Fact: (Goldman Sachs) alums are routinely Treasury secretaries, high-advisors to presidents, and occasionally a governor or United States senator.



• Fact: Jan Hatzius sent a letter for unlimited distribution and consumption hypothesizing that subprime mortgage crisis would get so bad "that it would affect aggregate lending extremely adversely and slow down growth."



• Fact: Hatzius admitted that he left out of his doomsday scenario the likelihood of action from the Federal Reserve.



• Fact: While aggressively selling risky CMOs to investors, Goldman Sachs was moving "to a considerably larger short posture."

A classic conflict of interest if there ever was one, and a nefariously sounding one at that. Rounding out the latest Wall Street conflict is another indisputable fact: Wall Street has a sordid history of harming investors through conflicted financial research targeted at individual investors. Stein actually mentioned disgraced Merrill Lynch tech-analyst Henry Blodget as proof, but it certainly doesn't begin and end with Blodget. Frankly, I couldn't decide whether I was reading classic Ben Stein satire given his shock at Goldman's audacity and influence.

Likewise we shouldn't be surprised that Goldman Sachs gets a free pass for alleged misdoings. They have never been held accountable. Take for example the Speer Leeds & Kellogg traders who were front running orders. After a menial fine it was back to business as usual and traders kept their jobs.

Stein's critics miss the only real opening to find fault in his column: that he's had his head in the sand if he thinks this is anything new.