Managers Of Collapsed Bear Hedge Funds May Be Charged

Jun 16 2008 | 1:20pm ET

The managers of two collapsed Bear Stearns hedge funds may be facing criminal charges.

Federal prosecutors in Brooklyn, N.Y., are set to compete their year-long investigation of the demise of the two funds this week. The Wall Street Journal reports that former managers Ralph Cioffi and Matthew Tannin could be hit with securities fraud charges within the next week.

The Journal warned that new evidence could emerge—the U.S. Attorney’s office is still conducting interviews—that could change the situation. Bear Stearns itself, now a part of JPMorgan Chase, is not expected to be charged.

The Bear Stearns High-Grade Structured Credit Fund and its more highly-levered sister vehicle, the High-Grade Structured Credit Enhanced Leverage Fund, collapsed last summer, the first high-profile victims of the subprime mortgage crisis, and the first major sign of trouble at Bear, which itself collapse in March. The funds’ failures cost investors $1.6 billion.

Prosecutors are trying to determine whether Cioffi and Tannin misled investors about the state of the funds last year. On an April 25, 2007, conference call with clients, Cioffi said he was “cautiously optimistic” about the future of the funds.

“The market will stabilize,” he said. “We have a plan in place that will get the funds back on track to generate positive returns.”

Instead, a month later, Cioffi and Tannin were selling off huge positions to raise cash to meet margin calls and cover redemption requests. What’s more, the two apparently expressed a great deal less optimism about the funds in internal communications.

Earlier in April, Cioffi reportedly exchanged e-mails with colleagues expressing concern about growing problems in the credit market. And in March, he transferred $2 million of his $6 million investment in the Enhanced Leverage fund to another Bear hedge fund.

Cioffi has defended both moves, reportedly telling prosecutors that he and Tannin had difficulty grappling with the fast-changing situation in the mortgage markets, and that the fund transfer was a show of support for another internal vehicle.

If Cioffi or Tannin are indicted, it would be the first criminal charges related to the ongoing credit crisis.

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