21 Aug 2009, Victoria Tozer-Pennington, Operational Risk & Regulation
NEW YORK - Former Bear Stearns fund manager Ralph Cioffi is claimed to have rarely adhered to compliance requirements during his trading activity at the firm, according to evidence prosecutors intend to produce at his trial. Cioffi, along with his former colleague Matthew Tannin, have been charged with conspiracy, securities fraud and wire fraud. Cioffi also faces an additional charge of insider trading. Both men deny the charges.
In a letter dated August 18, prosecutors from the US Attorney's office claim Cioffi was repeatedly challenged by compliance staff concerning potential conflicts of interests in trades between the securities firms and funds advised by its asset management unit.
Compliance rules required Cioffi to vet such transactions through an independent executive committee to ensure the actions were solely in the interest of the fund. However, prosecutors allege he failed to seek required approval 79% of the time in 2006, 59% of the time in 2005, 30% of the time in 2004 and 18% in 2003.
According to the prosecutors' letter, Cioffi grew more cavalier as time went on, and "hundreds of transactions that presented conflicts did not obtain the approvals required by federal law and by the offering memoranda".
Prosecutors intend to prove Cioffi knew of the role of the independent executive committee, and that both men encouraged investors to continue to put money into funds, even though they had concerns about their outlook months before their collapse. The funds - the Bear Stearns High-grade Structured Credit Strategies Master Fund and the Bear Stearns High-grade Structured Credit Strategies Enhanced Master Fund - imploded in June 2007.
The letter alleges Cioffi began a process in late March 2007 to transfer $2 million of his $6 million investment in one of the funds to another Bear Stearns hedge fund, Structured Risk Partners, fearing a potential meltdown. He was required to notify the executive committee of his $2 million redemption, but failed to do so. He is charged by prosecutors of intentionally concealing the redemption from the asset-management unit's management. Cioffi also concealed the transfer from investors. The letter also alleges Cioffi planned to use his investment in one of the funds as collateral for a loan to finance the building of a luxury condominium complex in Florida.
The trial is due to commence on September 28.