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Hedgemedia’s AltInvestment Global News Round-Up: Bear Stearns hedge fund managers arrested on securities fraud charges


Ralph Cioffi and Matthew Tannin, the former managers of the now-defunct Bear Stearns High Grade Structured Credit hedge funds, have been arrested at their

Ralph Cioffi and Matthew Tannin, the former managers of the now-defunct Bear Stearns High Grade Structured Credit hedge funds, have been arrested at their homes by FBI officers and indicted on nine counts of conspiracy, securities fraud and wire fraud.

According to the indictment, Cioffi and Tannin continued publicly to express confidence in the future of the funds while privately admitting their strategy was "toast" and discussing whether the funds should be closed. The collapse of the Bear Stearns funds last summer, costing clients some USD1.6bn, was a key step in the spread of market concern about mortgage-backed securities, helping to precipitate the credit crunch.

John Paulson of Paulson & Co has delivered a pessimistic view of the impact of the credit meltdown on financial services firms. Paulson, who correctly judged the woes in the US real estate and sub-prime mortgage markets, expects financial sector write-downs eventually to reach USD1.3trn, compared with current write-downs of USD380bn. The housing market shows no signs of stabilising and problems will spread to other sectors, including non-residential construction and consumer spending, he told delegates at the Gaim conference in Monaco.

The UK’s Financial Services Authority’s new rule requiring disclosure of short positions in public companies undertaking rights issues has met with criticism from the hedge fund community, with the Alternative Investment Management Association arguing that the FSA should have followed its customary consultation procedure with the industry before announcing the change.

The FSA believes that enhancing transparency of significant short selling in such shares would prevent any potential market abuse. The rule goes into effect on June 20 and gives managers almost no time to prepare, the association said. The FSA’s threshold triggering the disclosure could be changed in the future, while further measures could also be added in the Code of Market Conduct area if the new measures fail to achieve the desired effect.

Plans to increase tax on private equity managers are back on the agenda again. New York congressman Charles Rangel, chairman of the US House of Representatives Ways and Means Committee, has introduced a tax increase on private equity managers expected to raise some USD31bn. The measure is designed to offset in part the cost of exempting lower-income households from alternative minimum tax for another year. The issue became a hot button issue last year but was eventually shelved, and most observers believe change is unlikely to occur before the next US elections in November.

GSO Capital Partners, which was acquired by Blackstone Group this year, plans to launch a mezzanine fund with up to USD2bn in assets. Two Blackstone investors are expected to put money in the planned fund.

Ping Jiang, who previously worked as a trader at Steve Cohen’s SAC Capital, has established his own firm, Ping Capital Management, and hopes to raise USD500m for his debut hedge fund. Jiang left the USD16bn hedge fund manager in March following an accusation of harassment by former colleague Andrew Tong. Tong has accused both Jiang and Stamford, Connecticut-based SAC of ‘sexual harassment, a hostile work environment, discrimination and retaliation by defendants’ in a legal compliant.

Michael Youngblood, a senior mortgage analyst and money manager at FBR Investment Management, and his colleague Steve Gaenzler are establishing their own company, Five Bridges Capital, based in Washington, DC. Five Bridges plans to launch the Mortgage Opportunity Fund with at least USD100m and expects eventually to raise USD1bn in assets.

The fund will initially target investment in non-agency mortgage securities, which have not been hammered amid the US real estate decline and credit crunch. Jason Hu, a former quantitative mortgage-backed and asset-backed securities analyst at FBR, is among the firm’s initial hires. Gaenzler was a senior managing director and portfolio manager at FBR.

Former hedge fund manager and convicted fraudster Samuel Israel is a fugitive in the eyes of the US authorities. The manager was supposed to begin a 20-year prison sentence last week for defrauding investors in Bayou Group hedge funds, but law enforcement officials found his car abandoned near a bridge in New York state with a supposed suicide note. Having failed to find a body, police believe that Israel is on the run and could have gone abroad.

Carlyle Group has hired Sunil Kaul, who is now based in Singapore and previously was president of Citibank Japan, as senior director of financial services for its Asian business. Tagg Romney, the son of former Republican presidential contender and Bain Capital co-founder Mitt Romney, has set up a private equity firm, Solamere Capital, in Boston with three other principals. Hermes Private Equity, a unit of Hermes Pension Management, has hired Peter Gisselm as a partner and Mark Nunny as an investment manager.

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