Hedge pair indicted

Former fund managers at Bear Stearns accused of fraud

June 20, 2008|By Los Angeles Times

NEW YORK - The former managers of two Bear Stearns hedge funds that have been centerpieces of the subprime mortgage crisis were indicted yesterday, marking the first criminal charges against Wall Street figures stemming from the historic subprime meltdown.

The collapse in June 2007 of the now-infamous funds, which invested in securities backed by subprime home loans, sent a shudder through global financial markets and helped trigger a credit crunch that still afflicts the housing market and the overall economy.

The men were arrested at their homes yesterday morning. Matthew Tannin was taken into custody outside his New Jersey home and Ralph Cioffi was arrested at his New York City home, the Associated Press said.

Prosecutors in Brooklyn alleged that Cioffi and Tannin publicly talked up the prospects of the funds while privately expressing deep concerns about the looming disintegration of the subprime market.

The men were to be arraigned yesterday on nine counts of securities fraud, wire fraud and conspiracy.

The men believed as early as March 2007 that the hedge funds were "in grave condition and at risk of collapse" but told investors that the woes of the subprime market actually represented an "awesome" buying opportunity and persuaded some investors to shovel in more money, according to the indictment.

In an e-mail exchange that is likely to be central to the case, Tannin told Cioffi in late April that "the subprime market looks pretty damn ugly" and urged that the funds be closed because "there is simply no way for us to make money - ever."

Yet the two men reassured investors about the condition of the portfolios in a conference call three days later, according to the indictment.

"There's no basis for thinking this is one big disaster," Tannin said on the call.

Lawyers for the men issued statements disputing the charges.

"We are shocked and disappointed that the government has seen fit to fix blame on these two decent men," said Cioffi's attorney, Ed Little.

"Because [Cioffi's] funds were the first to lose [money] might make him an easy target, but doesn't mean he did anything wrong. Indeed, Mr. Cioffi had no motive to do anything wrong."

Tannin's attorney, Susan Brune, said her client did nothing wrong. "Matt Tannin is innocent," she said in a statement. "He is being made a scapegoat for a widespread market crisis."

It is normally difficult to prove intent in white-collar cases, said Maria Galeno, a former prosecutor and now a partner at Pillsbury Winthrop Shaw Pittman in New York. But the defense will have to explain the defendants' e-mail expressing concern about their funds, she said.

"There are some very troubling e-mails with which the defense lawyers are going to have to contend," Galeno said.

Wall Street investment banks piled into the mortgage business in the early half of this decade by repackaging home loans as tradable securities and selling them to investors.

Bear Stearns and other companies focused on the highly lucrative subprime business, which peddled loans to homebuyers with scuffed credit.

Bear Stearns opened the first fund in 2003 and the second one in 2006, raising more than $1.5 billion from investors. Both funds borrowed heavily to boost returns and initially gains as the subprime frenzy ramped up.

But the funds began unraveling in early 2007 as subprime defaults surged.

Regulators and prosecutors around the country are investigating whether Bear Stearns and other major companies intentionally deceived buyers of subprime securities by failing to disclose the lax underwriting standards used in making the loans that underpinned the bonds.

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