A former Bear Stearns Cos hedge fund manager facing an insider trading charge routinely ignored warnings of potential conflicts of interest, and was rebuffed when he tried to pledge some money toward a loan to build a luxury Florida condominium, prosecutors said.

The government revealed the new allegations against Ralph Cioffi in an August 18 letter to U.S. District Judge Frederic Block in the borough of Brooklyn, New York.

Block is overseeing a federal criminal case against Cioffi and former colleague Matthew Tannin, whom prosecutors say misled investors about the health of two Bear hedge funds that failed in 2007, costing investors roughly $1.4 billion.

Cioffi and Tannin were charged with multiple counts of fraud in a June 2008 indictment, while Cioffi faces an insider trading charge. The funds' failure was an early trigger for a credit crunch and the government-arranged sale of Bear Stearns to JPMorgan Chase & Co .

Dane Butswinkas, a lawyer for Cioffi, did not immediately return a call and email seeking a comment.

In its motion, the government said it wants to show Cioffi was repeatedly counseled but rarely adhered to guidance by his compliance staff about conflicts of interest involving trades his High Grade Structured Credit Strategies Enhanced Master Fund made with Bear Stearns itself.

The government said hundreds of transactions lacked needed approvals, with the percentage not approved by the fund's directors rising to 79 percent in 2006 from 18 percent in 2003. It said this led to a moratorium on in-house trades.

Prosecutors also want to show Cioffi's attempt in late 2006 to pledge his investment in the Enhanced Fund as collateral for a loan to complete a Florida luxury condominium complex that he and his brother were building.

They said Bear Stearns Asset Management's decision to block the pledge for what the government called the Sarasota loan caused Cioffi to become extremely upset, and accuse the unit's general counsel of being behind the refusal.

According to the motion, these prior uncharged acts provide probative evidence that Cioffi knowingly engaged in insider trading.

Prosecutors filed the motion to let Judge Block consider issues that might be prejudicial if jurors first heard them in open court.

The case is U.S. v. Cioffi and Tannin, U.S. District Court, Eastern District of New York (Brooklyn), No. 08-415.

(Reporting by Jonathan Stempel, editing by Matthew Lewis)

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