The Bear Stearns Lucky Bastards

Thanks to a top-secret settlement, a small group of Bear Stearns investors is getting back every cent they lost. The Daily Beast’s William D. Cohan on who’s pocketing $1 million checks—and why Wall Street is furious.

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Thanks to a secret settlement, a small group of Bear Stearns investors is getting back every cent they lost. The Daily Beast’s William D. Cohan on who’s pocketing $1 million checks—and why Wall Street is furious.

A small group of lucky Massachusetts investors in two now-defunct and worthless Bear Stearns hedge funds received an unexpected Christmas windfall: the return of 100 percent of their original investment in the billion-dollar funds.

The checks—some for as much as $1 million—were sent to the investors last month, after a confidential settlement between the state of Massachusetts and Bear Stearns Asset Management Inc., which is now owned by JPMorgan Chase.

One investor was told by a JPMorgan lawyer that Galvin “put a gun to our head” to agree to the settlement.

“My investment in these two hedge funds turned out to be one of the best investments I made in 2007,” joked one very happy investor, who got all his money back in the settlement. “I should have invested more.”

William F. Galvin, the Massachusetts secretary of state, orchestrated the November settlement, which all sides agreed to keep confidential. But word of the deal has spread like wildfire and sparked a furor among the hundreds of other investors in the Bear Stearns hedge funds who were not fortunate enough to live in Massachusetts. Some lost all of their investment in the two funds, and many others received only a small portion of their money back.

They are wondering what prompted the unexpected settlement in Massachusetts and why the lead attorneys in other states have not pursued a similar deal with JPMorgan Chase. They want more of their money back, too. One investor was told by a JPMorgan lawyer that Galvin “put a gun to our head” to agree to the settlement.

Investors frustrated by the secret settlement include billionaire Daniel Snyder, the principal owner of the Washington Redskins, who invested more than $1 million in the funds; Doug Sharon, the former head of Bear Stearns’ Boston office; and Shelly Bergman, another longtime Bear Stearns stockbroker. Sharon and Bergman both now work as brokers at Morgan Stanley and were among the largest employee investors in the hedge funds.

The failure of the two Bear Stearns hedge funds in June 2007 is generally believed to be among the first signs that serious trouble was brewing in the markets for debt backed by residential and commercial mortgages—trouble that led to the current credit freeze and ensuing economic turmoil. The two men who ran the hedge funds, Ralph Cioffi and Matthew Tannin, were indicted in June 2008 by a federal grand jury in the Eastern District of New York on charges of conspiracy, securities fraud, and wire fraud in conjunction with their management of the two Bear Stearns hedge funds from their inception in 2003 to their bankruptcy filing in July 2007. Their trial is expected to begin later this year. If convicted of securities fraud, they face maximum sentences of 20 years of imprisonment. If convicted of conspiracy, they each face a maximum sentence of five years.

Galvin was among the first to file a legal action against Bear Stearns Asset Management relating to the failure of the two hedge funds. On November 17, 2007, he filed an “administrative complaint,” claiming essentially that Cioffi and Tannin had made numerous trades with affiliates, particularly Bear Stearns, the broker-dealer, without getting the required independent third-party consents to do the trades in a timely fashion (or in some cases at all). A technicality, to be sure, but one that goes to the heart of the importance of investor transparency and fair-dealing. Cioffi’s failure to obtain the third-party consents to the trades with affiliates also happened to violate federal and state securities laws. Galvin’s complaint detailed numerous instances of the violations, including a failure of a succession of hedge-fund employees to get the approvals in a timely fashion, despite supposedly being instructed to do so. Galvin’s complaint alleged “that more than 2,300 principal transactions required approval” of independent third parties and that “hundreds” were not approved prior to the trade settlements, as required by the Investment Advisers Act of 1940. The situation became so bad that in mid-2006, Bear Stearns Asset Management prevented Cioffi from trading further with its Bear Stearns affiliate.

In July 2007, the two hedge funds, with around $1.6 billion of investors’ money, began the process of being liquidated. During the fall of 2007, Bear Stearns, the parent company, sought to reach what seemed like arbitrary settlements with various investors in the funds, as a way of avoiding litigation with them, if possible. Those who invested in May or June 2007 and accepted in the offer got all their money back; those who invested between January 2007 and April 2007 and accepted the offer got two-thirds of their money back; and those who invested before January 2007 and accepted the offer received one-third of their money back.

Some corporate and institutional investors got some of their money back and some did not. No employees who invested got any of their money back from Bear Stearns, whether they lived in Massachusetts—like Doug Sharon, a longtime Massachusetts resident—or not, and otherwise could have participated in the Galvin settlement. Many former Bear employees who invested in the hedge funds believe the firm decided to settle with those investors, such as corporations and other large clients, who could be potential customers again and let the former employees twist in the wind.

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Galvin’s November 2008 settlement with JPMorgan Chase put $9.3 million back in the pockets of the fortunate Massachusetts investors, giving them 100 cents on the dollar and, in many cases, topping up their original settlements with Bear Stearns. But the settlement has led to some unfortunate and quirky developments. One investor who had established trust funds for his two children in Massachusetts, which invested in the Bear Stearns hedge funds, could not get his own money back but got money back for the trusts. When he called David Weintraub, the lawyer at JPMorgan Chase who is handling the investor deals, he was told “to pound sand” and “do what you have to do” but he would not be allowed to participate in the Massachusetts deal. Weintraub told other investors from outside Massachusetts the same thing. He did not respond to a call seeking comment.

Then there is the case of Daniel Snyder, a billionaire Washington businessman and Washington Redskins owner. He invested more than $1 million in the Bear Stearns’ hedge funds and has only received a portion of his money back. When he and his lawyers caught wind of the Galvin settlement, he understandably wanted to know if he could somehow participate in it, too. But his lawyers got no satisfaction, either. Look for Snyder to bring the Massachusetts settlement to the attention of the attorney general in Maryland, where he is a resident. Through a spokesman, Snyder declined to comment for this article.

Other than the “gun to our head” comment, just why JPMorgan Chase agreed to the settlement with Galvin is still a mystery. There is speculation that one or several politically prominent Massachusetts residents who were investors in the hedge funds forced Galvin to play hardball with JPMorgan Chase. Brian McNiff, a press spokesman for Galvin, said he was too busy to comment on the settlement. Mary Sedarat, a spokesman for JPMorgan Asset Management, declined to comment.

Whether the Massachusetts settlement will serve as a template for the vast array of less-fortunate investors in the Bear hedge funds from other states to push for a similar settlement with JPMorganChase remains to be seen. Michael Bamberger, a spokesman for New York State Attorney General Andrew Cuomo, did not respond to a request for comment about whether Cuomo would pursue a similar legal settlement on behalf of New York investors.

William D. Cohan, a former senior-level M&A banker on Wall Street, is the author of The Last Tycoons: The Secret History of Lazard Freres & Co. Cohan's House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, will be published by Doubleday in 2009. He also writes for Fortune, ArtNews, The Financial Times, and The Washington Post.