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.