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?

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.

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?

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.

Again, let me stress this is all speculation.

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.

Is it at all possible that he didn’t do anything wrong and was earning his pay? Or am I simply being naive?