Kate Kelly, who covers Wall Street for the Wall Street Journal, provides this analysis of newly released transcripts surrounding the Bear Stearns hedge funds.

Snippets of an April 25, 2007 investor conference call held by Bear Stearns Cos. hedge-fund manager Ralph Cioffi, which we link to here, read like a handbook of Things Not To Say When Your Fund Is Imploding. At least, federal prosecutors from the U.S. Attorney’s office in Brooklyn might think so.

Brooklyn prosecutors have launched a criminal investigation into whether Mr. Cioffi and his colleague Matthew Tannin engaged in securities fraud by telling fund investors they were optimistic about the prospects for two hedge funds they managed when in fact they worried privately about the funds’ future, according to people familiar with the matter. The question they must grapple with: how much Messrs. Cioffi and Tannin really knew when they held that call. Were they truly aware of the deep declines to come? Or foolishly upbeat about their funds’ prospects, despite market indications of the pain that was to come?

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During the April 25 call, Mr. Cioffi told investors that the two funds, called the High-Grade Structured Credit Strategies Fund and the High-Grade Structured Credit Strategies Enhanced Leverage Fund, were down just slightly for the month. But figures he released to investors about a month later revealed that the Enhanced Leverage fund, which was the riskier of the two, was in fact down 23% through late April, and its sister fund down about 5%.

Nor were investors informed at the time of Mr. Cioffi’s early March move of $2 million of his own money out of the Enhanced Leverage fund and into a third fund he managed, Structured Risk Partners, that ultimately proved less risky. (Mr. Cioffi has told associates that the money transfer, which was approved by compliance officers at Bear Stearns Asset Management, was intended to show confidence in the third fund.)

Five weeks after the conference call, around June 5, the Enhanced Leverage fund was gated, or barred from returning investor money. For much of May and June, Messrs. Cioffi and Tannin scrambled to sell billions worth of mortgage-backed securities in hopes of raising cash for lender margin calls. But when they came up short, Merrill Lynch & Co. on June 15 seized the collateral assets attached to its loan. Other lenders quickly followed suit, ultimately forcing the funds to file for bankruptcy in late July.

One loser in the process: Bear Stearns broker Shelley Bergman, who had placed a number of clients in the two High-Grade funds. Mr. Bergman, who questioned Mr. Cioffi sharply in the call (see questions from “Shelly” in the transcript), left Bear earlier this year for Morgan Stanley, where he now works. He referred a call for comment to his lawyer.

Here are some highlights from the April 25 call.

On how secure the funds’ loans were:

Mr. Cioffi: “…one of our main strategies over the last several years has been to put in place significant amounts of non-recourse term funding…the reason we did that is so that we would not be faced [with becoming] a forced seller due to margin calls, or, you know, having repo lines removed or terminated.”

On the possibility of big redemptions, or investor requests for their money back:

Mr. Cioffi: “Obviously the big question we’ve been getting from a number of investors are [sic] how do we look on a redemption subscription basis. The next big redemption date would be June 30th and, as of now, I believe we only have a couple of million of redemptions for the June 30th date.”

On the state of the structured credit market (which is home to complex mortgage-backed securities like CDOs):

Mr. Tannin: “…the structured credit market, and the subprime market in particular, has not systematically broken down…there is no concern among [analysts and mortgage servicers] that there is gonna be a performance that is not historically rational.”

On the state of the funds in general:

Mr. Tannin: “…from a structural point of view, from an asset point of view, from a surveillance point of view, we’re very comfortable with exactly, you know, where we are…it is frustrating to have had a negative month. It is frustrating to be in an industry where people are writing articles daily about how the world is coming to an end…”

On the near-term picture:

Mr. Cioffi: “We are cautiously optimistic that the CDO market has found its footing and will trade, on a going forward basis, based upon actual credit fundamentals…Where we have those risks in our portfolio, we feel comfortable that we have significantly hedged them…The market will stabilize…We have a plan in place that will get the funds back on track to generate positive returns.”