The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

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By Topic: Bear Stearns

  • From Vol. 3 No.7 (Feb. 17, 2010)

    Arbitration Panel Awards Bear Stearns Hedge Fund Investor Racetrac $3.4 million for Claims of Misrepresentation, Negligence and Failure to Supervise

    On December 23, 2009, an arbitration panel awarded $3.4 million to Racetrac Petroleum Inc., an Atlanta-based chain of more than 525 gas stations and convenience stores across the U.S. Southeast.  Racetrac lost its $5 million investment in a former Bear Stearns hedge fund that collapsed in July 2007.  See “How Can Hedge Fund Managers Structure Their Compliance, Reporting and Disclosure Systems to Avoid Allegations of Principal Trading Rule Violations Such As Those Recently Alleged by the DOJ Against Former Bear Stearns Hedge Fund Manager Ralph Cioffi?,” The Hedge Fund Law Report, Vol. 2, No. 36 (Sep. 9, 2009).  The award amount represents only 70 percent of Racetrac’s investment, but is significant because it is the first ruling in favor of an investor in one of two now defunct Bear Stearns hedge funds since a jury acquitted the funds’ former managers of criminal charges in November 2009.  We describe Racetrac’s specific claims and the panel’s decision.

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  • From Vol. 2 No.44 (Nov. 5, 2009)

    As Criminal Trial Looms, Small Victory for Bear Stearns Hedge Fund Manager Matthew Tannin

    The notable indictment, arrest and prosecution of Matthew Tannin and Ralph Cioffi, two hedge fund managers for the now-defunct Bear Stearns Asset Management (BSAM) has, at least for Tannin, taken a momentarily beneficial turn.  Accused of conspiracy, securities fraud and wire fraud, and with trial looming, Tannin moved to suppress a purportedly damaging e-mail the Federal Bureau of Investigation (FBI) had recovered from his personal e-mail account with a search warrant.  The Honorable Frederic Block, who presides over the case in the United States District Court for the Eastern District of New York, agreed with Tannin that the search warrant was deficient, the resulting search unconstitutional and that the United States Attorney’s Office could not cure the error.  As a result, on October 26, 2009, the court ordered the e-mail suppressed on the eve of trial.  We describe the background of the action and the court’s legal analysis with respect to Tannin’s motion to suppress.

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  • From Vol. 2 No.36 (Sep. 9, 2009)

    How Can Hedge Fund Managers Structure Their Compliance, Reporting and Disclosure Systems to Avoid Allegations of Principal Trading Rule Violations Such As Those Recently Alleged by the DOJ Against Former Bear Stearns Hedge Fund Manager Ralph Cioffi?

    In a motion in limine filed in the insider trading case against Ralph Cioffi, the former head of failed Bear Stearns hedge funds, the U.S. Attorney’s Office for the Eastern District of New York alleged that Cioffi repeatedly violated the policies and procedures of Bear Stearns Asset Management, Inc. (BSAM) regarding principal trades.  Specifically, the motion alleges that despite repeated warnings from the BSAM compliance department, Cioffi repeatedly executed principal trades without making the disclosures or obtaining the consent required by Section 206 of the Investment Advisers Act of 1940 (Advisers Act).  Unlike the better-publicized allegations that Cioffi touted the glowing prospects of his funds while expressing serious misgivings about their prospects behind closed doors, or that he redeemed from his funds while in possession of material non-public information that, if public, would have severely diminished the value of the funds, the alleged principal trading rule violations are noteworthy for hedge fund managers for the same reasons that they are not front page news.  Saying X and doing Y is wrong for obvious reasons, as is redeeming when counseling investors not to redeem.  But precisely what constitutes a principal trade, when and how to obtain consent, what to disclose – these are subtler questions that may apply to any hedge fund manager with an interest in one of its own funds, whether or not the funds are on the brink of collapse.  Accordingly, the principal trading rule violations alleged against Cioffi offer a cautionary tale for hedge fund managers, and serve as an occasion to revisit the most pressing questions arising in the hedge fund context relating to principal trades, including: what precisely are the relevant principal trading rules and the statutory bases therefor?  At what threshold of ownership is a client or account of a hedge fund manager considered “owned” by that manager or its principals for purposes of the principal trading rules?  How is that ownership stake calculated?  In light of the allegations against Cioffi, what specific measures can hedge fund managers take to craft effective compliance, reporting and disclosure systems to avoid similar allegations?  What happens if a principal trade occurs without proper disclosure and consent?  This article explores these and related questions.

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  • From Vol. 1 No.7 (Apr. 15, 2008)

    Bear Stearns Hedge Funds Liquidators Sue Bear Entities and Others for Fraud

    Liquidators of Bear Stearns High-Grade Structured Credit Strategies (Overseas) Ltd. and Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage (Overseas) Ltd. sued various Bear Stearns entities, related individuals and the funds’ accountant alleging fraud, breach of fiduciary duty and negligence in connection with the collapse of the funds.

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