Oct. 28 (Bloomberg) -- Bear Stearns Cos. hedge fund manager Ralph Cioffi told investors in April 2007 that there had been a “couple of million” dollars in redemptions, days after being told an investor asked to withdraw $57 million.

Evan Kerr, a former managing director of Bear hedge fund sales, testified in federal court that he told Cioffi on April 18, 2007, that his client, Concord Management LLC, a Tarrytown, New York, hedge fund adviser, intended to pull its investment in Cioffi’s funds, after meeting that day with Cioffi and fellow fund manager, Matthew Tannin.

Cioffi, 53, who managed the two funds, and Tannin, 48, his chief operating officer, are accused of misleading investors about the health of those funds in 2007. Both men are charged with conspiracy, securities fraud and wire fraud and face as many as 20 years in prison if convicted of the most serious count of securities fraud. Both have pleaded not guilty and deny the charges against them.

“I came back to Matt’s office after that meeting and he believed that they were going to redeem,” Kerr told a jury in Brooklyn, New York.

Kerr said he later sent e-mails to Cioffi, Tannin and Greg Quental, then Bear’s global head of hedge funds and Cioffi’s supervisor, confirming the intent of Concord to make two separate redemptions on May 31 and June 30, 2007.

Investor Call

“As of now, I believe we have only a couple of million redemptions for the June 30th date,” Cioffi said during an April 25, 2007, investor call, which was played yesterday for the jury. “So far, we’ve gotten a reasonable amount of subscriptions into the Enhanced and High Grade Funds.”

Cioffi also noted on the call, which lasted about 90 minutes, that Bear Stearns had agreed to commit $25 million more into the Enhanced Fund.

“This is not a systematic breakdown of the entire structured finance market,” Cioffi told investors. “It’s really a matter whether you believe careful credit analysis makes a difference and again, there’s no basis for thinking this is one big disaster,” he said.

During the call Cioffi and Tannin expressed optimism about subprime-mortgage-related securities. He said while some viewed the performance of these securities an “unmitigated disaster,” he said it was a “dislocation.”

Plenty of Liquidity

Cioffi said the funds had plenty of money to survive a large number of redemptions.

“We had a perfect storm, we have lived through it, we have plenty of liquidity,” Cioffi said during the call.

Kerr said he contacted Cioffi after the call ended and asked him about the amount redemptions Cioffi had cited. Kerr said Cioffi responded, “I hadn’t seen them on the sheet” listing the pending redemptions for the funds provided to him.

He sent Cioffi and Tannin an e-mail with follow-up questions from investors on April 25, which stated, “Concord question, when you talk about redemptions and about ‘a few million’ they were a little taken aback by that.”

Kerr said Cioffi responded in an e-mail asking when Concord was redeeming “I thought their fund cycle was August,” Cioffi wrote. “Are they June or August?”

Assistant Brooklyn U.S. Attorney Ilene Jaroslaw asked Kerr his reaction to Cioffi’s e-mail.

“Based on my belief and from e-mails, it was quite clear that it was May and June,” Kerr testified. “I don’t know where August came from.”

Kerr said Cioffi sent him an e-mail later that same day stating, “Make sure they know I thought they were August.”

‘We’re 24/7’

During the call for the two funds which Cioffi managed, the High Grade and Enhanced Fund, he told investors, “You guys have a very devoted asset management team here,” he said. “Our money is in all three of these funds.”

He ended the call saying, “We’re 24/7 on the job,” adding, “We are focused.”

Cioffi’s lawyers have suggested through questioning, that Concord could have rescinded its withdrawal request and that investors frequently changed their minds.

“I thought the meeting was a good start toward retaining” Concord, Kerr wrote Cioffi, Tannin and another fund manager in an e-mail after April 25th call.

Concord lost all of its investment in the Bear funds, witnesses testified at the trial. Michael Matlin, of Concord Management, declined comment on the testimony.

The Bear Stearns funds, which invested most of their assets in subprime-mortgage-related securities, failed when prices for collateralized debt obligations linked to home loans fell amid rising late payments by borrowers. Bear Stearns sought bankruptcy protection for the two funds on July 31, 2007.

CDOs are created by packaging assets including bonds and loans and using their income to pay investors. The securities are divided into different portions of varying risk and can offer higher returns than the debt on which they are based.

Cioffi’s $2 Million

The U.S. alleges Cioffi also committed insider trading when he withdrew $2 million, one-third of his holdings in Bear Stearns funds, on March 23, 2007, while in possession of non- public information, just before the funds unraveled and collapsed in June and July of 2007.

If convicted of that charge, Cioffi faces as long as 20 years in prison.

Cioffi’s lawyers had told the jury the money was properly transferred to another fund he supervised and argued he was the only Bear portfolio manager who had his own money in the funds.

On cross-examination by Dane Butswinkas, Cioffi’s lawyer, Kerr testified Cioffi never told him about his personal investments in the funds, and he never asked him.

“Our general sense was, at Bear Stearns, was, ‘Look, it’s a significant portion of their liquid net worth,” Kerr said, referring to the portfolio team’s investments in the funds.

If investors pushed to know more, he would tell them an overall figure of investment for the team, Kerr said.

The case is U.S. v. Cioffi, 08-CR-00415, U.S. District Court, Eastern District of New York (Brooklyn).

To contact the reporters on this story: Patricia Hurtado in Brooklyn Federal Courthouse at 1093 or pathurtado@bloomberg.net; Thom Weidlich in New York at tweidlich@bloomberg.net.

Last Updated: October 28, 2009 00:01 EDT