Ex-Bear Hedge Fund Managers Arrested, Charged

Jun 19 2008 | 12:34pm ET

The former managers of a pair of collapsed Bear Stearns hedge funds have been arrested and indicted on charges of securities fraud.

Ralph Cioffi, who served as chief portfolio manager of the Bear Stearns High Grade Structured Credit Fund and its more highly-levered sister fund, and Matthew Tannin, who was the funds’ chief operating officer, face nine counts of conspiracy, securities fraud and wire fraud. They are set to appear before a federal judge in Brooklyn, N.Y., later today.

The two men were arrested by the Federal Bureau of Investigation at 7 a.m., Cioffi at his Tenafly, N.J., home and Tannin at his Manhattan apartment. After being processed at FBI headquarters in Manhattan, they were brought outside in handcuffs and taken to the Brooklyn courthouse. In addition, the Securities and Exchange Commission may sue the pair as soon as today.

According to the indictment, Cioffi and Tannin misled investors about the state of the subprime mortgage-heavy funds, which collapsed last summer, costing clients $1.6 billion. The men allegedly made their misrepresentations during in-person meetings and on at least one conference call with investors, in which Cioffi said he was “cautiously optimistic” about the funds’ futures.

Prosecutors say Cioffi and Tannin also misled senior Bear officials, telling them in late April—while they were allegedly expressing private concerns about the funds—that “they were confident that the funds were in good shape and would continue to be successful.”

In particular, prosecutors are focusing on an e-mail Tannin allegedly sent to Cioffi, saying he was afraid the mortgage-backed securities market was “toast,” and that they should consider closing the funds. The feds have also portrayed Cioffi’s late March transfer of one-third of his $6 million investment in one of the funds as motivated by fears the funds were in trouble.

Cioffi and Tannin have said they decided that Tannin’s fears were overblown, and that Cioffi’s transfer was designed to boost another Bear hedge fund, not to flee a collapsing one.

Attorneys for the men blasted the charges, calling their clients scapegoats for the financial crisis that has cost Wall Street hundreds of billions and Bear Stearns its independence.

“Because his funds were the first to lose might make him an easy target but doesn’t mean he did anything wrong,” Edward Little, representing Cioffi, said.

“The credit crisis took everyone by surprise, including the Fed and Treasury,” Little added. “Dozens of the largest financial institutions in the world have lost over $300 billion to date on the same investments. Ralph Cioffi’s funds lost money in exactly the same way.”

Tannin’s lawyer, Susan Brune, said her client is innocent. “He is being made a scapegoat for a widespread market crisis,” she said.

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