2 Bear Stearns Hedge Fund Managers Arrested For Ripping Off Investors

how to become hedge fund manager, you would have seen a lot of "star analysts" from investment banks pushing dotcom stocks they underwrote that eventually became penny stocks.

Investment banking is a cut throat business, after all. If everything goes right and investors make money, no one is interested to know how the funds actually operate, or how good an investment bank's internal control is. The same can't be said when the market turns sour. When trillions of dollars vanished in the Asian financial crisis in 1997 and the dotcom bust in 1999, regulatory authorities, angry investors, financial reporters, bitter unemployed professionals and academics all came out to witch hunt and point fingers, several high profile investment bankers and traders were arrested for fraud or inside trading. After a year or two of low market activity, investors and bankers move on to the next big hype, completely forgetting the lessons learned.

It would come as little surprise that as an aftermath of the subprime mess, Bear Stearn's hedge fund managers Ralph Cioffi and Matthew Tannin were arrested. The SEC accused the duo for systematically downplaying the risks of subprime mortgages in their portfolios in their public statements, and misstating the total exposure to investors. Cioffi and Tannin allegedly told investors that only 6% of their portfolios was linked to subprime mortgages, an internal audit found that the actual figure would amount to around 60%.

There were also allegations that the two had exchanged emails with each other and several other colleagues in which they discussed the dire financial situation the portfolios were in, Cioffi urged them not to discuss the difficulties with others.

Most investment banks have clear, spell out guidelines of email usage. And most people with half a brain would know it is extremely unwise to put down sensitive information in black and white when those information can land you in jail. It may seems counterintuitive why investment bankers, often smart, ambitious graduates from top business schools, would do that. The fact that Cioffi climbed all the way to the top to become Bear Stearns Asset Management's senior managing director to make such a mistake has made it more dumbfounding.

If you have actually worked for an investment bank, you would know why. Email is THE most used communication medium in the bank, followed by chat. It is not uncommon that analysts receive more than 200 emails a day, most are work related while a small percentage are gossips and rants from colleagues. Since ibankers work long hours (10-13 hours), they pretty much eat and live in their little cubicles and have little time to go outside and socialize, a little personal use of the company email is granted a quiet okay by the management. Over time the line has blurred and a false sense of security has developed that email communications are truly confidential. Cioffi and Tannin would have built a much better case if they kept those information to themselves, and it is definitely a lesson for the hedge fund managers and investment bankers who still have a job out there.