Insider trading and Bear's Collateral Condo Pledge: A long list of red flags

Ralph Cioffi, a former Bear Stearns hedge fund manager, has been indicted for an alleged fraud which contributed to firm's downfall. Mr. Cioffi and another former Bear Stearns hedge fund manager, Matthew Tannin, were indicted last year. The duo allegedly mislead investors about the status of the firm's two hedge funds whose failure costs investors approximately $1.6 billion in July 2007. Bloomberg is reporting that according to the government, Mr. Cioffi also "rarely" listened to the firm's compliance trading measures and had a combatitive relationship with Bear Stearns compliance and legal department.


Mr. Cioffi has also been charged with insider trading for redeeming $2 million from the Bear Stearns Enhanced Fund. This represented approximately 1/3 of his investment in the fund. Specifically, the government is claiming that Mr. Cioffi used material non-public information to time his withdrawal before the fund's collapse. Adding insult to injury news is also coming out that Mr. Cioffi attempted to pledge his investment in the fund as collateral for a building loan for a luxury condo complex his brother was building in Sarasota, Florida. Bear Stearns apparently didn't grant approval for this. Apparently, "Cioffi became extremely upset and accused the general counsel of BSAM of being behind the decision," the U.S. said in court papers.

Outside business activities fund relatives building developments, in-fighting among internal units, a hedge fund manager fighting with the firm's compliance department and a hedge fund manager reducing his stake in the firm. This long list of red flags seems to keep getting longer...

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Another day, another fraud - Mr. Pippin's search for Ponzi fulfillment

Stuart J. Pippin of Kerrville, Texas, USA today was to be sentenced today for defrauding 35 investors of over $2 million dollars. Mr. Pippin, who is 60 years old and in a twist of irony, is named after a famous Broadway musical in which, “The Leading Player invites the audience to join them in a story about a boy prince searching for fulfillment.” Perhaps that’s what Mr. Pippin’s investors were looking for when they wrote checks without apparently performing any due diligence whatsoever.


Mr. supposedly told investors he would be running a commodity trading pool. The problem was that no trading actually occurred. Even worse, Mr. Pippin never even had bothered to set up a trading account for his CTA, Pippin Investments. In classic Ponzi fashion, Mr. Pippin even went so far as to manufacture false account statements and pay false dividends to some investors with other people’s money.

As if it was any consolation, at least the good Mr. Pippin wasn’t discriminating in selecting his victims which including his brother Fred, his former dentist brother-in-law Randall Voigt and other friends and relatives.

The CFTC caught on and sued Mr. Pippin who in 2006 was forced to pay $1.68 million in restitution and $106,500 fine. More recently the FBI came in and pursued a criminal indictment for wire fraud which is the crime he was being sentenced for today.

While this amount of money lost in this case may seem paltry when compared to the large scale sums of hundreds of millions of dollars in play in fraud cases such as Madoff, these cases highlight an important point. Often times it is the ultra-high net worth individual rather than the large institution that needs to be overly cautious in the hedge fund due diligence process.

This is particularly true for operational due diligence when an investor may have little to no concept of the additional types of operational risk they are signing up for when investing in a hedge fund manager. Perhaps a new good rule of thumb for hedge fund investing harkens back to an old classic: if a manager cannot explain, either operationally or from an investment perspective, what they are doing and it seems too good to be true – don’t invest. There are plenty of other people who will provide transparency in an effort to secure your investment.

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Another Hedge Fund Fraud - Mark Bloom Over Concentrates

Last week, hedge fund manager and certified public accountant, Mark Bloom pleaded guilty in U.S. federal court to charges he faced in the U.S. Here is the original SEC complaint and the original CFTC complaint.


Mr. Bloom was accused of, among other things, stealing in excess of $20 million from clients and selling illegal tax shelters while working at BDO Seidman LLP.

Mr. Bloom was the manager of the North Hills Fund and admitted to committing securities and mail fraud. Bloomberg reported that the North Hills fund investment strategy was purportedly to be diversified among several hedge fund strategies however, Mr. Bloom apparently concentrated over 50% of his fund into something called the Philadelphia Alternative Asset Fund (a former commodity trading pool which appears to be in receivership). More interestingly, it has also been reported that Mr. Bloom waited more than a year to tell investors of this concentration in the Philadelphia fund.

What seems interesting to me is that this notion of investors waiting to be told certain pieces of information by a hedge fund. Due diligence in hedge funds, both investment and operational, is a two-way street. Long gone are the days of investors being able to sign away large sums of money and wait to hear how the manager allocates them. Any basic investment due diligence review of any organization which allocates capital (i.e. - the North Hills fund in this case) should include specifics of how this capital is being allocated. While investors may be subject to fraud, if a manager claims to have allocated capital to a certain entity investors should not be afraid to confirm this. While a full detailed confirmation may be overbearing, a spot check, particularly for large relationship is certainly not unheard of.

This concept is extended throughout the field of hedge fund operational due diligence as well. Investors should not take on face value that a hedge fund may or may not have a certain relationship with a particular underlying organization to which capital has been allocated or a particular service provider. Confirming such relationships often takes little more than a quick phone call or email and investors who have done so will sleep much better at night. Of course, more detailed due diligence reviews can and should be performed to determine the way in which certain service providers work with hedge funds, but at least confirming the relationship is a good starting point.

In the case of Mr. Bloom and North Hills it seems that if investors, or their advisers, may have done a little due diligence, a possible fraud may have been detected before they lost their money.

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$90 million+ unaccounted for in Sextant accounts

MARCH 13, 2009

The Ontario Securities Commission reported today that it is unable to account for more than $90-million
at hedge-fund operator Sextant Capital Management Inc.

The OSC alleges that the fund company and its "driving force" Otto Spork inflated returns of the Sextant Strategic
Opportunities Hedge Fund through self-dealing and investments in companies purported to have increased significantly in value despite producing no revenue or profit.

Sextant Capital Management’s funds at Royal Bank of Canada and Newedge Canada Inc. were frozen under an order endorsed on Dec. 15 by the Ontario Superior Court of Justice. The court filing is available here.

An OSC hearing is scheduled for March 16.

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