Bear Stearns Fund Prosecutors Reveal `Lot of Evidence' of FraudPaul Radvany in Bloomberg, June 20, 2008
E-mails, witness statements and a money trail may help convict two former Bear Stearns Cos. managers accused of misleading investors and lenders about two hedge funds that imploded, legal analysts said.
Ralph Cioffi, 52, and Matthew Tannin, 46, were charged yesterday with falsely saying the funds were thriving while knowing investments in subprime mortgages could cause their collapse. U.S. prosecutors claimed the men lied about liquidity, redemption requests, and their own investments before the funds shut down last June, costing investors $1 billion.
``This one is a shotgun of all sorts of facts,'' said former federal prosecutor William Mateja. ``They've got a lot of evidence to establish a securities fraud against hedge fund managers. Not having heard the other side of the story, it appears that they have a strong case.''
The indictment and arrests of Cioffi and Tannin are the first charges relating to last year's mortgage-market breakdown. The government is probing banks and mortgage firms whose losses in subprime loans and related securities total $397 billion.
Cioffi and Tannin were each charged in federal court in Brooklyn, New York, with conspiracy, securities fraud and wire fraud. Cioffi also was charged with insider trading for his $2 million redemption from one fund. They face as long as 20 years in prison on the fraud counts. They also were sued by the U.S. Securities and Exchange Commission.
Cioffi's lawyer criticized Brooklyn U.S. Attorney Benton Campbell for ordering the arrests, saying it was an effort by the government 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,'' defense lawyer Edward Little said.
Tannin's lawyer, Susan Brune, said her client is innocent and prosecutors have made him a ``scapegoat.''
The 27-page indictment details how Cioffi and Tannin began the Bear Stearns High Grade Structured Credit Strategies fund in October 2003. They said it was a low-risk investor in high-grade securities including collateralized-debt obligations, or CDOs, that offered returns of 10 percent to 12 percent, according to the indictment.
By 2006, returns fell, and the men started a second, more leveraged fund into which most clients transferred their money, prosecutors said. By March 2007, Cioffi and Tannin believed the funds ``were in grave condition and at risk of collapse,'' prompting fraudulent statements and actions to stave off a run by investors, according to the indictment.
The men fretted in April after a report showed the CDOs were worth far less than they hoped, according to the indictment.
``The subprime market is pretty damn ugly,'' Tannin wrote in one e-mail to Cioffi. ``If we believe the [CDO report is] ANYWHERE CLOSE to accurate I think we should close the funds now. The reason for this is that if [the CDO report] is correct then the entire subprime market is toast.''
Tannin sent the e-mail from a personal account, not the Bear Stearns system, to the personal e-mail account of Cioffi's wife, according to the indictment.
That e-mail and others cited in the indictment ``are really absolutely the key,'' said Villanova University Law School Dean Mark Sargent, who read the indictment.
``They show that they knew the funds were cratering, that the bottom had dropped out of the subprime market, and their leverage was putting enormous pressure on the fund,'' Sargent said.
The e-mails ``support the government's theory that the defendants are thinking one thing and saying another to investors or lenders or internal brokers,'' said Paul Radvany, a Fordham University law professor and former federal prosecutor.
``It's hard to imagine a compelling reason not to use Bear Stearns's internal e-mail to talk about Bear Stearns hedge funds,'' said Christopher Clark, a former federal prosecutor in New York.
Prosecutors also cited a series of statements that Cioffi and Tannin made to investors in conference calls and privately to lenders and subordinates. Cioffi failed to tell investors that he redeemed $2 million of his $6 million investment, moving it to another Bear Stearns hedge fund, prosecutors said.
In a conference call on April 25, 2007, Cioffi discussed investor withdrawals, saying there would be ``a couple of million of redemptions'' by June 30, according to the indictment. He knew there had been $47 million in redemptions, prosecutors said. Cioffi didn't mention his own $2 million withdrawal, according to the indictment.
Tannin repeatedly told investors that he would add his own money to the funds, and didn't, prosecutors said.
``It's very hard to say you weren't shading the truth in an important way when you say you had a couple of million dollars of redemptions when in fact you had $47 million,'' Clark said.
``The movement of money is key,'' said Andrew Hruska, a former federal prosecutor in Washington and Brooklyn. ``That's a matter of 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.''
The case is U.S. v. Cioffi, 08-00415, U.S. District Court, Eastern District of New York (Brooklyn).