Mounting evidence damns Bear Sterns pair
June 22, 2008
By David Voreacos
New York - E-mails, witness statements and a money trail may help convict two former Bear Stearns managers accused of lying to investors and lenders about two US hedge funds that imploded, according to legal analysts.
Ralph Cioffi and Matthew Tannin were charged on Thursday with saying the funds were thriving while knowing that investments in subprime mortgages could cause their collapse.
Prosecutors claim the men lied about liquidity, redemption requests, and their own investments before the funds shut down last June, costing investors $1 billion (R8 billion).
Former US federal prosecutor William Mateja said: "They have a lot of evidence to establish a securities fraud against hedge fund managers. Not having heard the other side, it appears they have a strong case."
The indictment and arrests of Cioffi and Tannin are the first charges relating to last year's breakdown of the US home loan market. The government is probing banks and mortgage lenders that have lost $397 billion on subprime loans and related securities.
Cioffi and Tannin were each charged in federal court with conspiracy, securities fraud and wire fraud. Cioffi was charged with insider trading for a redemption of $2 million from one fund. They face up to 20 years in jail on the fraud counts. The US Securities and Exchange Commission has also sued them.
Cioffi's lawyer, Edward Little, criticised US attorney Benton Campbell for ordering the arrests, saying it was an effort to make an example of innocent men. "Because his funds were the first to lose might make him an easy target but doesn't mean he did anything wrong."
Tannin's lawyer, Susan Brune, said prosecutors had made her client a "scapegoat".
The indictment details how Cioffi and Tannin began the Bear Stearns High Grade Structured Credit Strategies fund in October 2003, which they said was a low-risk investor in high-grade securities including collateralised debt obligations (CDOs) that offered returns of 10 percent to 12 percent.
By 2006 returns fell, and they started a second, more leveraged fund into which most clients transferred their money.
By last March the duo felt the funds "were at risk of collapse", prompting fraudulent statements and actions to stave off a run by investors, according to the indictment. It says the men fretted in April after a report showed the CDOs were worth far less than they hoped.
"The subprime market is pretty damn ugly," Tannin wrote in one private e-mail to Cioffi. "If the CDO report is correct then the entire subprime market is toast."
The e-mails "support the government's theory that the defendants are thinking one thing and saying another", said Paul Radvany, a law professor at Fordham University.
Prosecutors also cited a series of statements that Cioffi and Tannin made to investors, lenders and subordinates. Cioffi failed to tell investors he had moved $2 million of his $6 million investment to another fund. And Tannin repeatedly told investors he would add his own money to the funds, and didn't.
"The movement of money is key," said Andrew Hruska, a former federal prosecutor. "That's not just saying but doing. When you say 'I'm putting in money' when in fact you're taking it out, there's no argument."
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