The odd thing about former hedge fund manager Ralph’s Cioffi’s departure from Bear Stearns isn’t that it has happened, but that it is taking place now. The decision to keep him on as an advisor was inexplicable, unless there was some convoluted legal reasoning, for example, that keeping him in the Bear tent would lead to greater cooperation and assistance with the expected litigation (the official reason was so that he could assist in the unwinding of the investments).
As we noted before, while this looks bad, it may have been permissible under the firm’s offering agreement, and people close to the situation claim that Cioffi withdrew the cash before the funds got in trouble. I’m sure the Feds are working up a timeline on that very issue.
From Bloomberg:
Bear Stearns Cos. hedge fund manager Ralph Cioffi left the firm amid an investigation by U.S. prosecutors into whether he improperly pulled his money from two funds before they collapsed in July.
Cioffi, 51, ceased to be an employee last week, Bear Stearns spokeswoman Elizabeth Ventura said in an interview today. She declined to say why he left or to comment on the federal probe. He had stayed on as an adviser to the New York- based securities firm after being relieved of his duties as a fund manager in June, when his funds’ subprime mortgage investments began to unravel….
The U.S. Attorney in Brooklyn and the U.S. Securities and Exchange Commission are investigating Cioffi’s withdrawal of some of his own money from the funds, three people with knowledge of the matter said. The probe is part of a broader regulatory review of the funds’ implosion, according to the people, who declined to be identified because the examination isn’t public. Investors in the two funds, which filed for bankruptcy in July, lost $1.6 billion of capital.
The Wall Street Journal reported the probe of Cioffi earlier today.
Cioffi pulled $2 million of his own money, one third of the amount he’d invested in one of his funds, before March so he could commit it to another fund he set up, one of the people said. The withdrawal occurred before the funds ran into trouble, the person said
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The decision to keep him on as an advisor was inexplicable, unless there was some convoluted legal reasoning, for example, that keeping him in the Bear tent would lead to greater cooperation and assistance with the expected litigation (the official reason was so that he could assist in the unwinding of the investments).
Is it at all possible that he didn’t do anything wrong and was earning his pay? Or am I simply being naive?
Generally, there is a ritual of getting rid of the person who is immediately responsible for a big problem (in Japan, the top guy resigns, here the supervising grownup is shown the door). Consider all the other heads that have rolled at Bear, all the way up to Warren Spector. So it would have been logical for Bear to get Cioffi to resign. Keeping him on is unusual.
Now admittedly, in the case of LTCM, all the partners were retained during the wind-down at diminished pay. But the fund had complex and large positions in many markets.
It doesn’t seem plausible to me that Cioffi was so indispensable that he had to be retained. There were clearly other staff involved in running the fund. One would think they’d be up to the task of liquidating it.
Who is picking up Cioffi’s legal tab? If he has been represented by BS attorneys, then management could see the shape and extent of the investigations. Meanwhile, someone in Cioffi’s shoes would feel he is going to be backed up and will be candid with “his” attorneys. This is likely a broad investigation and BS’s first concern is that the firm itself not be indicted. So the more details management has, the better they can “co-operate” by tossing the dogs to the wolves while hoping that will be enough.
I certainly can’t say for sure. However, for the matter of suits against the fund, it’s unlikely that Cioffi would be sued separately (he was acting as an employee of the fund management company). In the Federal investigation, his interests are different from those of the firm. He should have his own legal representation. Under these circumstances, I doubt the firm would pick up his tab unless he had negotiated that as part of an employment agreement. Even in that case, they might be able to void it if he were eventually found guilty of fraud.
Again, let me stress this is all speculation.
So the use of the word “inexplicable” in the post refers solely to performance of the fund, and not to the post’s topic? I misunderstood.
No, that it was odd that Bear kept Cioffi on as an advisor after the funds were seriously in trouble. One was allowed to fail (I am going by memory, I think that decision was made mid-late July if not sooner) and Bear had put up a credit facility while it managed the wind-down of the remaining fund.
Bear supposedly has lots of expertise in the kind of paper the fund traded; that was part of their pitch in selling the fund. So it wasn’t as if Cioffi had unique or irreplaceable expertise. So that’s why keeping him on didn’t seem to be warranted.
Yves,
Yes, you’re right, I’m sure Cioffi has his own lawyer(s) for the criminal investigation. The question is the timing of when Cioffi was notified that he is a target (if he is one), and what kind of information management learned up to that time by everybody `hanging together’. This is all speculative, as you say. What surprises me is that BS never announced an internal investigation. To me, that would suggest that there are things known to management that no one wanted committed to writing. Anyway, it’s very odd; an investigation by outside counsel is usually the first thing a firm in the gunsights of the SEC wants to do. So what’s BS’s strategy?
Steve,
Very good observations. It may be that Bears’ reading of the offering document was that Cioffis’ withdrawal was permitted (although if that was the case, you’d think they would have said so to the press).
The real issue may be the ambiguity of the funds’ relationship to Bear. Recall early on, Bear wanted to let them fail; it was only when the firms that had credit exposures had fits that Bear relented. So Bear may not have felt it had oversight responsibility.
Technically, I don’t think they were Bear entities. But they operated on Bear premises (I think), used personnel that came from Bear, said they were using Bear risk models, and had Bear employees among the investors.
Yves,
Is this the same fund as covered here?
Massachusetts regulators accused Bear of fraud for improperly trading mortgage-backed securities with two internal hedge funds that collapsed this summer. Regulators in the office of Secretary of State William F. Galvin say Bear employees improperly made “hundreds” of principal trades for the firm’s own account with the hedge funds without notifying the funds’ independent directors in advance. Bear declined to comment….
http://www.nakedcapitalism.com/2007/11/it-isnt-over-till-fat-lady-sings-bear.html
John
PS You do know that it is standard procedure for the shadow controller to hold signed, undated letters of resignation from the offshore directors?