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Arresting Bear Stearns

June 20, 2008 – Comments (0) | RELATED TICKERS: BSC

  Two former Bear Stearns hedge-fund managers were arrested yesterday and hit with the first criminal charges to arise on Wall Street from the subprime mortgage debacle, signaling what could be a wave of prosecutions related to the meltdown in the housing market, according to The Associated Press.

Ralph Cioffi and Mathew Tannin were indicted on conspiracy, secuities and wire fraud charges for lying to investigators in a hedge fund that tanked last year as the subprime market collapsed. The implosion of the hedge funds cost investors $1.8 billion and foreshadowed Bear's own crisis.

According to Mark Mershon, head of the New York FBI office, "This is not about mismanagement of a hedge fund. It is about premeditated lies to investors and lenders."

The case comes as the federal government has launched a national crackdown on fraud related to the mortgage crisis that has sent shockwaves through the global economy. The Justice Department said that more than 400 real estate industry players have been indicted since March - 60 of them on Wednesday.

The case against Cioffi and Tannin is based heavily on a series of e-mails that revealed intriguing behind-the-scenes disorder at the Bear hedge fund as its investments began to slide last year, setting off a state of panic among the defendants.

"If we believe the (report) is anywhere close to accurate I think we should close the funds now. The reason for this is that if (the report) is correct then the entire subprime market is toast," Tannin wrote wrote in an April 2007 e-mail to Cioffi.

Prosecutors said that the situation became so dire that Cioffi pulled $2 million if his own money from the fund. But at the same time, the defendants advised investors to hold onto their positions and told them that the outlook was indeed positive, according to authorities.

Cioffi, 52, was arrested by FBI agents in his home on the Upper West Side of Manhattan yesterday morning and Tannin, 46, was taken into custody outside his New Jersey home.

Tannin "is innocent," said his attorney Susan Brune. "He is being made a scapegoat for a widespread market crisis." Cioffi's attorney declined comment. Both defendants were released on bond during an arraignment in which they pleaded not guilty.

Experts said Tannin and Cioffi will likely not be the last Wall Street figures to be charged in the credit crisis.

For Cioffi and Tannin, their internal e-mails provide a window into the troubles that began to engulf the hedge fund in 2007.

According to the complaint, Tannin expressed his doubts about Cioffi's management in a March 2007 e-mail to a third fund manager. Around the same time, it adds, Cioffi wrote to a team economist, "As we discussed it may not be a meltdown for the general economy, but in our world it will be. Wall Street will be hammered with lawsuits."

But Tannin and Cioffi repeatedly told investors and Bear Stearns brokers responsible for selling funds that the outlook was good.

In one instance, prosecutors say Tannin told an investor that they "are seeing opportunities now ... I am adding capital to the fund." But prosecutors say Tannin never invested more of his own money.

At the same time, prosecutors say Cioffi moved $2 million of his roughly $6 million investment in the fund to a separate fund, never telling investors of the move. As a result he was charged with insider trading in addition to the fraud counts.

The Bear hedge funds failed in June 2007. The funds had more than $20 biilon in assets before crashing.

Phool on,

F4Phanatic