Making a market all by yourself...
Now investigators are trying to determine whether Cioffi and his team
crossed legal lines. The Klios provided the Bear hedge funds with a
ready, in-house trading partner. Their financial reports, which were
reviewed by BusinessWeek, show many months in which the Cioffi-managed
Klios traded only with the Cioffi-managed Bear funds. For example, in
April, 2006, one Klio CDO bought $114 million worth of securities from
one of the Bear funds. Such trades, says Steven B. Caruso, an attorney
who represents several Bear hedge fund investors, may be "indicative
of an incestuous, self-serving relationship that appears to have been
designed to establish a false marketplace."
If that's why the trades were made, the maneuvers could have falsely
boosted the hedge funds' returns—and the fees Cioffi and his team
collected. In an e-mail to Cioffi and co-manager Matthew Tannin cited
in a legal filing, Raymond McGarrigal, another executive at the Bear
funds, gushed about the Klio setup, writing that "one of the great
things we've done is allow the Klio to buy assets from the hedge
fund." Lawyers for Tannin and McGarrigal declined to comment.
The End of an Era?