Bear Fund Manager Probed on Withdrawal

Weeks before the two funds began imploding in April, fund manager Ralph Cioffi moved about $2 million of his own money from the riskier of the two hedge funds into another internal fund with a separate investment strategy, these people say.

Mr. Cioffi's move effectively lowered his exposure to the riskier of the two failed funds when it was on the brink of significant declines, these people say. No other senior Bear executive invested in the funds, according to people familiar with the matter.

A spokeswoman for Bear declined to comment.

Speaking to fund investors not long after the money transfer, Mr. Cioffi and a fellow fund manager still were publicly bullish about their two main funds, High-Grade Structured Credit Strategies Fund and a riskier sister fund.

As late as April 25, when they held an investor conference call, the two managers were telling investors that the amount of money investors were attempting to withdraw was lower than the amount of new money coming in, according to a lawyer representing investors who lost money in the funds.

"The consistent theme was that the investor redemptions were a lot less than the fresh investments," contends Ross Intelisano, a plaintiff attorney whose clients lost approximately $80 million when the Bear funds collapsed in late July. "That's what kept people in."

Businessweek.com reported yesterday that prosecutors were examining whether Bear Stearns insiders associated with the funds were pulling money out of the portfolios before this year's mortgage-market turmoil. The Wall Street Journal reported the existence of the criminal probe in October.

Before he removed the $2 million, in February or March, Mr. Cioffi had invested about $6 million in the riskier of the two High-Grade funds, say the people familiar with the matter. But after moving part of that investment into a third fund within Bear Stearns Asset Management, as Bear's money-management arm is known, Mr. Cioffi's remaining exposure in the riskier High-Grade fund was $4 million, these people added.

The securities unit of the U.S. Attorney's office in Brooklyn began examining the failing Bear funds during the summer, people familiar with the matter have said. Alongside investigators from the Securities and Exchange Commission, which is conducting a civil probe, criminal prosecutors are examining whether the High-Grade fund and its riskier sister fund were properly sold and managed. The funds, which have filed for bankruptcy protection, wiped out $1.6 billion in investor capital.

-- Kate Kelly, The Wall Street Journal