If this story proves to be valid, Bear has a major mess on its hands. Business Week reports that the SEC and the US attorney’s office in Brooklyn are looking into whether Bear permitted insiders to withdraw their capital in February and March from the two Bear hedge funds that failed later in the year. The reason this is troubling is that outside investors who wanted to redeem at that time were told the earliest they could access their money was the end of June, and as it turns out, the funds were frozen in early June.
The story notes, correctly, that it’s possible these moves were kosher:
Scott Berman, an attorney who specializes in hedge fund litigation, says not all insider redemptions are improper. He notes insiders could have economic reasons for pulling money out of a fund, and often the offering documents for a fund will give managers some latitude on the issue of when they can withdraw their own money.
Nevertheless, these funds are already embroiled in litigation, and preferential withdrawals by employees would not stand in Bear’s stead.
Update 12/18, 12:10 AM: The Wall Street Journal came up with more details. It looks as if the target of the investigation is fund manager Ralph Cioffi, who allegedly moved $2 million of his holdings out of the riskier of the two fund he managed in February into an unrelated fund. Note the Journal doesn’t say how much (if any) of his own money was left in the two funds.
This looks ugly indeed. Even if the fund offering documents allowed managers to withdraw funds preferentially, the misleading statements about fund inflows sound, ahem, problematic. From the Journal:
Federal criminal prosecutors investigating the collapse of two internal hedge funds at Wall Street firm Bear Stearns Cos. are examining whether a Bear executive improperly withdrew money he had invested in one of the funds while making optimistic forecasts about the portfolio’s prospects, people familiar with the matter say.
Weeks before the two funds began imploding in April, fund manager Ralph Cioffi moved about $2 million of his own money from the riskier of the two hedge funds into another internal fund with a separate investment strategy, these people say.
Mr. Cioffi’s move effectively lowered his exposure to the riskier of the two failed funds when it was on the brink of significant declines, these people say. No other senior Bear executive invested in the funds, according to people familiar with the matter….
Speaking to fund investors not long after the money transfer, Mr. Cioffi and a fellow fund manager still were publicly bullish about their two main funds, High-Grade Structured Credit Strategies Fund and a riskier sister fund.
As late as April 25, when they held an investor conference call, the two managers were telling investors that the amount of money investors were attempting to withdraw was lower than the amount of new money coming in, according to a lawyer representing investors who lost money in the funds.