Category Archives: Hedge Fund Failures

The plot continues to thicken in the saga of Bernard (Bernie) L. Madoff. Earlier today, authorities placed the mastermind behind a $50 billion hedge fund Ponzi scheme under house arrest. Now, instead of late-night Manhattan parties, the once-revered Wall Street legend will be subjected to electronic monitoring and 7 p.m. curfews.

At the center of the Madoff controversy is the Securities and Exchange Commission (SEC) and questions as to why it took so long for the agency to detect Madoff’s misdeeds. As far back as 1999, the SEC apparently had knowledge that all was not right in the house of Madoff. Returns in his fund were consistently and unusually high: 15% to 22%. A decade ago, memos from competitor manager Harry Markopolos and others even went so far as to allege Madoff’s business was nothing more than a “Ponzi scheme.”

In true ‘a-day-late and a-dollar-short fashion,’ Christopher Cox, chairman of the SEC, is now admonishing his agency’s inactions for failing to rein Madoff in when it had the chance. Yesterday, Cox publicly stated that the SEC failed to act on “credible allegations” when it was presented with the information nine years ago.

Madoff’s world came crashing in only when redemption requests, totaling some $7 billion, started to pile up and he was unable to meet investors’ demands for their money.

As it turns out, Madoff’s scam lured every kind of investor imaginable, from the super rich to the ordinary. Pension funds, global financial firms, hedge funds, higher education institutions, charities, the co-owner of the New York Mets, even a Senator bought into Madoff’s hype. Now, they’re collectively $50 billion poorer.

Shortly before his arrest on Dec. 11, Madoff was living life large. As reported Dec. 17 by Bloomberg, the disgraced money manager had recently made his usual stop for a $65 a haircut, a $40 shave, a $50 pedicure and a $22 manicure. If convicted of securities fraud, Madoff could spend the rest of his life in jail, where personal etiquette might not be so glamorous.

Our securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

From humble beginnings as a lifeguard to a storied investment leader on Wall Street, Bernard (Bernie) L. Madoff has seen and done it all. Or, so he thought. Following Madoff’s arrest by federal agents last week for running a giant Ponzi scheme and losing at least $50 billion of his clients’ money, the next stop for the now-infamous hedge fund manager may be jail.

According to the criminal complaint, Madoff revealed his bogus investing business to his sons on Dec. 10. The two men, Andrew and Mark Madoff, then contacted their lawyer, as well as federal authorities. It was later revealed that Madoff apparently had been running the scheme since at least 2005, and only recently did problems surface when he became unable to meet redemption requests from clients for some $7 billion.

A Ponzi scheme is coined after Charles Ponzi, an Italian immigrant who swindled investors out of millions of dollars in the 1920s through a modern-day pyramid scheme in which early investors are paid with money from newer investors.

Madoff’s rise to Wall Street fame began innocently enough. He opened his investment firm in 1960, with $5,000 he had saved from working as a lifeguard during the summer. His star continued to rise over the next half century; his positions of authority included chief of the Securities Industry Association’s trading committee, vice chairman of the National Association of Securities Dealers and a member of the Nasdaq Stock Market’s Board of Governors and its Executive Committee.

To no one’s surprise, Madoff also did exceedingly well in his personal life, amassing a multimillion-dollar fortune that included mansions in New York and Palm Beach, as well as a 55-foot yacht ironically named “Bull.”

Prior to Madoff’s Dec. 11 arrest, there apparently had been several warning signs over the “fiscal soundness” of Madoff’s managed funds. Competing hedge fund managers had long questioned how Madoff was able to consistently generate exceedingly high returns year and year, while investors themselves regularly claimed that the account statements Madoff provided were too complex for them to understand.

Meanwhile, the SEC itself appears to have been asleep at the wheel regarding Madoff and the inner-workings of his so-called investment business. Nine years ago, the agency received a letter from Boston financier Harry Markopolos, who at the time warned that Madoff’s firm was the world’s largest Ponzi scheme. Markopolos went on to conduct his own investigation, turning his findings, which apparently were largely ignored by the SEC, over to agency’s New York and Boston bureaus.

Now the SEC’s inaction during the past nine years may well have shattered the last remaining remnants of investor confidence. As for Madoff, when FBI agents went to his Manhattan home at 8:30 a.m. Thursday morning to make their arrest, they asked if he had an innocent explanation for what had happened, according to statements provided in the criminal complaint. Madoff, dressed in a blue bathrobe and slippers, simply said: “There is no innocent explanation.”

Our securities lawyers are actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Matthew Tannin and Ralph Cioffi, former Bear Stearns’ hedge fund managers, were taken into custody at their homes Thursday morning. They are facing criminal charges due to the collapse of the subprime mortgage market and the resulting implosion of the two hedge funds they managed.  

Both former executives are accused of deceiving investors about the risk of their investments in subprime mortgages. The principal question is what did they really know when they presented the funds as promising investments.  

The prosecutors look to rely heavily on private emails.  According to the Wall Street Journal, the two allegedly sent emails implying the funds they invested in were about to crash four days before they told their investors they were confident in these funds. Tannin supposedly told Cioffi he thought the market they invested in was “toast” and wanted to shut down the funds.  

“The arrests are appropriate given the magnitude and the egregiousness of their alleged misconduct,” said attorney Steven Caruso, who is representing investors in arbitration cases against these funds.  

Their arrests are the first of possible fraud cases by banks and mortgage firms whose investments in the subprime market decreased in value. The market’s losses are now totaling around $396.6 billion. The current indictments may lead to several other criminal cases and civil suits in the future. 

Bear Stearns’ termination should have been predicted when the Federal Reserve intervened early this year to bail out the bank after the hedge funds collapsed. This collapse added fuel to the fire for the recent credit crisis. It was proof that the market could critically impair the companies that bought and resold these loans.  

Tannin and Cioffi were brought up in lawsuits last year by hedge fund investor, Barclays Bank, claiming they were purposely misled. Barclays stated Bear Stearns’ knew for months the assets in its Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund had decreased in cost since their original value.  Barclays reported that the email from Tannin said the fund is “having our best month ever.” But, at the time the fund was actually having “severe liquidity problems, and lost hundreds of millions of dollars.”  The funds failed despite Cioffi and Tannin’s positive evaluations , resulting in over $20 billion in assets to crash.

Former Bear Stearns Cos. managers Ralph Cioffi and Matthew Tannin are on the verge of criminal charges for securities fraud for mismanaging two Bear Stearns Cos. hedge funds, costing investors $1.6 billion in losses.  

Federal prosecutors have suggested that Cioffi and Tannin could face indictment. “At issue is whether the managers intentionally misled investors by presenting a rosy picture of the funds at a time when they were privately communicating with colleagues about their worries over how the investment vehicles would ride out weakness in the mortgage market,” says Wall Street Journal reporter Kate Kelly.  

Bear Stearns’ recent history of financial problems has raised concerns over its management abilities and risk controls. Bear Stearns invested large amounts of borrowed securities into bonds backed by subprime mortgages.

Despite the subsequent meltdown of mortgage-backed securities, Cioffi and Tannin remained optimistic about the subprime market. However, in May 2007, Bear Stearns was unable to repay its investors with cash and meet demands from lenders for additional cash, or margin calls. As a result, Bear Stearns lent $3.2 billion in order to recover its High-Grade fund only to see the funds file for bankruptcy protection a month later. Additional losses to the firm came from the bond market losses and investor panic. 

The potential indictment of managers from Bear Stearns, now part of J.P. Morgan Chase & Co., could mark the beginning of more investigations dealing with the mortgage-market crisis, which began a year ago. More financial firms are taking precautions to provide more precise valuations on their holdings of mortgage securities.

After 18-years, Citigroup veteran Reaz Islam, is leaving the firm.  Mr. Islam most recently was the manager of two Citigroup, Inc. hedge funds that have imploded over the last several months.

The hedge funds, Falcon Strategies and ASTA/MAT, are fixed income funds marketed to individual investors.  The funds were sold as low risk, conservative investments.  Over the last couple of months, both of these funds have been wiped out. 

Falcon Stategies has lost over 75% of its value and ASTA/MAT was at one time down 77%. 

Last month Citigroup set aside $250 million to help some investors recoup a portion of their losses.  Unfortunately, this set aside does not even begin to fully compensate for investors’ losses.  As a result, a number of lawsuits have been filed by aggrevied investors.  

Our firm is interested in meeting with investors of these funds in order to evaluate their investments to see if a case of action exists.