An indictment has been unsealed in federal court in New York, charging Ralph Cioffi, the founder and senior portfolio manager of two Bear Stearns hedge funds, and Matthew Tannin, a portfolio manager of the funds, with conspiracy, securities fraud and wire fraud. Cioffi was also charged with insider trading.
The charges were announced by Benton J. Campbell, U.S. Attorney for the Eastern District of New York, and Mark J. Mershon, assistant director-in-charge of the Federal Bureau of Investigation, New York Field Division.
According to the indictment, Cioffi created the Bear Stearns High Grade Structured Credit Strategies Fund in 2003 and the Bear Stearns High Grade Structured Credit Strategies Enhanced Fund in 2006. The indictment alleges that the defendants marketed the funds as a low-risk strategy that invested primarily in high-grade debt securities, such as AAA- and AA-rated tranches, or pieces, of collateralized debt obligations (CDOs).
Both funds utilized leverage by borrowing capital from Wall Street lenders with the hope of earning a higher rate of return on their investments than the costs of the loans. By late summer 2006, the funds held approximately $1.4 billion of investor funds under management.
The indictment alleges that by March 2007, the defendants believed that the funds were in grave condition and at risk of collapse. However, rather than alerting the funds' investors and creditors to the bleak prospects of the funds and facilitating an orderly wind-down, the defendants made misrepresentations to stave off withdrawal of investor funds and increased margin calls from creditors in the ultimately futile hope that the funds' prospects would improve and that the defendants' incomes and reputations would remain intact. The subsequent collapse of the funds during summer 2007 resulted in losses to investors totaling more than $1 billion.
Throughout spring 2007, the defendants and other fund employees privately acknowledged the funds' declining financial prospects. According to the indictment, Cioffi told another Fund employee that he feared the current state of the CDO markets and saw a long-term meltdown on the horizon.
Source: Federal Bureau of Investigation