Posted by: Ben Steverman on June 19, 2008
By Matthew Goldstein and David Henry
Ex-Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin are now the first Wall Street executives to face criminal charges arising from the mortgage market meltdown. A federal grand jury in Brooklyn, NY indicted the pair on securities fraud charges on June 18, sources familiar with the nearly year-long investigation say.
Click here to see a copy of the indictment.
Prosecutors are set to announce the filing of charges against Cioffi and Tannin at an afternoon press conference on Thursday. Both men are already in custody and awaiting arraignment in Brooklyn federal court. The filing of criminal charges against the former hedge fund manager would be coupled with the filing of a civil complaint by the Securities and Exchange Commission. An SEC spokesman declined to comment. A spokesman for Eastern District of New York US Attorney Benton Campbell declined to comment.
Sources say attorneys with the SEC are planning to attend a joint press conference with federal prosecutors to announce the filing of charges. Lawyers for Cioffi and Tannin have hired a public relations firm to manage the expected flood of media inquiries. Andy Merrill, the spokesman, says he has no comment at this time.
The investigation is believed to be focusing on comments Cioffi and Tannin made to investors in the funds, as well as to the lending desks of the big Wall Street banks that lent the hedge funds money. In early 2007 the managers told investors and the Wall Street firms that the funds were performing well, even as the pair scrambled to keep them afloat. Prosecutors have focused on those statements as well as Cioffi’s decision to move some of his money out of the funds before they collapsed.
The failure of the Bear funds wiped out $1.6 billion investor capital and led to a spate of litigation. At one point, the two funds controlled nearly $30 billion in mortgage-related securities and were one of the bigger buyers of collateralized debt obligations. The demise of the Bear funds sparked the broader collapse of the market for securities like CDOs, a conglomeration of pieces of bonds that are backed by subprime mortgages, and set off a tightening of the credit markets that persists today.