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Wednesday, February 13, 2008

Bear Stearns & Ralph Cioffi: Breaking Up is Hard to Do

We've obtained the termination "Form U-5" filed by Bear Stearns regarding the now departed portfolio manager, Ralph Cioffi, who guided the two hedge funds specializing in investing in mortgage backed securities into the abyss. My prior blog post anticipated this filing.

The document discloses Cioffi left the firm under a "mutual agreement" with Bear Stearns effective November 28, 2007. The U-5 further states that in June 2007 the firm initiated an internal investigation into Cioffi's "role and conduct" in the failed funds and that "in addition, Federal and state regulators and law enforcement are also investigating" the same hedge funds and "similar issues".

Bear Stearns clearly wanted an amicable departure. Often when firms are under investigation they look to scapegoat others. In this instance, Bear Stearns has a strong interest in keeping Cioffi "on-the-reservation" given the firm's exposure to allegations of fraud in criminal and civil proceedings. The firm stands to benefit so long as their interest and Cioffi's are aligned. Therefore Bear Stearns doesn't have any incentive to include "negative" disclosures which could shed light into how the hedge funds collapsed.

This is stark contrast to allegations that Wall Street firms use Form U-5 to defame departing employees in order to scapegoat them for firm-wide wrongdoing or prevent them from competing on a fair level. I actually have clients that allege Bear Stearns did just that when the firm struck a $250 million settlement with the SEC over mutual fund market timing. The sordid tale was chronicled by Forbes in a story entitled "Fall Guys".

The message is that on Wall Street, you get the "kid-glove" treatment if you're either a Wall Street CEO, or as with Cioffi, the firm needs a friend for upcoming litigation.

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