Legal News

Deets Emerge on the Bear Subprime Criminal Probe

By Dan Slater

Back in June, when the Law Blog read about the collapse of two Bear Stearns hedge funds tied to subprime, we thought, there’s going to be a great legal angle here.

Now, thanks to WSJ colleague Kate Kelly, we’ve got details. She reports on a developing criminal investigation into the Bear hedge fund fallout. Citing people familiar with the matter, Kelly writes that on an April 25 conference call Bear fund manager Ralph Cioffi told participants he was “cautiously optimistic” about the bank’s ability to hedge its holdings of securities tied to subrime. Meanwhile, back in March, Cioffi moved $2 million of his own money out of one of the troubled Bear funds, Kelly’s sources say. Also, Cioffi allegedly continued to voice his concern to colleagues about the withering states of the credit markets and subprime securities, and wondered aloud whether they could ruin his funds.

During the April conference call, the story says, a participant wondered whether packaged mortgage securities in the fund — called collateralized debt obligations, or CDOs — were tied to subprime assets. Cioffi allegedly replied that he didn’t have time to teach “CDO 101.”

According to the WSJ, federal prosecutors in Brooklyn began a criminal probe last summer, and are now looking at whether the disparity between the alleged public and private comments could constitute fraud. Supboenas have not yet been issued, and Bear itself, according to the story, is unlikely to be indicted.

Cioffi and his co-manager plan to mount an aggressive defense, the people familiar with the matter say. Cioffi is likely to argue that his decision to move the $2 million was approved internally and that discussions about the market turmoil and its potential impact are just standard fare in a bank.

Full post as published by Law Blog - WSJ.com on February 15, 2008 (boomark / email).