Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin surrendered to the FBI on Thursday morning to face charges of conspiracy, securities fraud, and wire fraud. Cioffi also faces a charge of insider trading.
The indictment alleges that the men, whose funds were among the first to implode in the subprime mortgage market collapse last summer, engaged in several forms of stockbroker misconduct. Prosecutors say the men knew by March 2007 that their funds were in grave condition, and ready to collapse, but as late as May 2007, they were assuring investors that the funds were in top condition and would continue to increase in value.
Cioffi had moved $2 million of his own money out of the funds in March, but in an April conference with investors that he was "very comfortable" with the financial position of the hedge funds.
Tannin told investors that he was boosting his investment in the funds, a statement that proved to be false. In a message he sent to Cioffi in April 2007, Tannin said, "I think we should close the funds now," and if the securities their funds were based on became degraded, "there is simply no way for us to make money—ever."
In addition to making false statements about their own engagement in the hedge funds, they deceived investors about the number of redemption requests—investors wanting to withdraw from the funds—they had received. On May 3, according to prosecutors, Tannin told a lender that they didn't expect large redemption requests, but by that time 13 investors, including the fund's biggest investor and Cioffi—had all sought redemptions.
In defense of the two men indicted today, lawyers claim that the men did nothing wrong and that the subprime lending mess "took everyone by surprise." Lawyers said they "[look] forward to acquittal." In fact, if they are judged against their peers, their conduct was the norm rather than the exception.
In many cases, the parent companies have been implicated in covering up for fund managers and brokers by spouting fairy-tale estimates of losses to keep investors engaged in funds that were doomed. Executives at UBS, Merrill Lynch, Citigroup, AIG, and Lehman Brothers either candy-coated loss projections or misrepresented their exposure to the subprime market crisis.
The First—but not the Last
Prosecutors are likely to bring forward more figures in the subprime market crash to face criminal charges. From fund raters to brokers to managers to CEO's, it seems that many individuals were involved in this high-stakes game of financial brinkmanship, played with other people's money, their homes, and their very livelihoods
If you were among the many people who suffered as a result of the deceitful practice of a stockbroker or financial advisor, contact the experienced financial fraud litigation attorney Thomas C. Bradley today for a free consultation.