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Wednesday, December 19, 2007

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.


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