Bear Stearns Execs Face Federal Charges

The managers of two Bear Stearns hedge funds whose collapse last summer signaled the start the of the credit crisis could get slapped with criminal charges this week, according to a published media report.

The U.S. Attorney for New York's Eastern District expects to wrap up interviews related to the case this week, according to a report in The Wall Street Journal that cited people familiar with the situation. Prosecutors have indicated to lawyers with interests in the case that indictments could come soon, although one source said evidence could still come out that could change that, the report said.

The managers in question are Ralph Cioffi and Matthew Tannin, who ran Bear's High Grade Structured Credit Strategies and High Grade Structured Credit Strategies Enhanced funds. The highly leveraged funds loaded up on securities linked to risky subprime mortgages when the market for those securities was roaring. But after that market turned south early last year, the funds found themselves facing significant losses.

The U.S. Attorney's office and a lawyer for Tannin declined to comment, while a a lawyer for Cioffi didn't return a phone call seeking comment, according to the report.

The two funds blew up early last summer after finding themselves unable to meet investors' demands for repayment and lenders' calls for more collateral. Their collapse highlighted the erosion of the market for complex securities linked to subprime mortgages and hinted at problems to come for parent Bear Stearns, which had its own highly leveraged mortgage portfolio.

News that federal prosecutors were probing the Bear Stearns funds emerged late last year.

The key question in the case is whether the managers deliberately misled investors early last spring about the funds' prospects even as they may have been privately communicating to co-workers concerns about the subprime mortgage market, the Journal noted. Also of interest are Cioffi's intentions when he moved $2 million of his own money out of the one of the funds last March, even as Bear was urging the funds' investors to stay the course. Cioffi told colleagues that he transferred the money to help another Bear Stearns hedge fund, the Journal noted.

Bear Stearns went into a tailspin earlier this year after investors and trading partners staged what amounted to a run on the bank. It was purchased by JP Morgan Chase(JPM Quote) in a deal brokered by the Fed Reserve.