Updated from 2:56 p.m. EDT
Federal authorities on Thursday charged two former
fund managers with conspiracy and fraud charges, part of a broad federal crackdown on the mortgage market that includes 144 cases related to individual loans.
The Securities and Exchange Commission and the U.S. Attorney's office filed charges against Matthew Tannin and Ralph Cioffi, the Bear managers, accusing them of misleading investors and institutions they traded with about the extent of the losses in their portfolio. Cioffi has also been charged with insider trading. The Bear Stearns fund managers caused about $1.4 billion in losses, an FBI press release says.
"Operation Malicious Mortgage," targeting individual mortgage fraud, encompasses a three-and-a-half month investigation involving several federal agencies. The Federal Bureau of Investigation estimates that the 144 individual cases, which have resulted in charges against 406 defendants across the country, have led to $1 billion in losses.
"The FBI will continue to direct investigative and analytic resources towards mortgage fraud and corporate securities fraud that threaten our nation's economy," said FBI Director Robert Mueller, in the press release.
Cramer: Bear Arrest Could Scare Hedge Funds Straight
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Tannin was arrested outside his home in New Jersey Thursday morning and Cioffi was taken into custody in New York City, according to the
The SEC's complaint against Cioffi and Tannin states that the two executives made several misrepresentations to investors, who relied on them as their only sources for information on the funds' subprime exposure, margin calls and redemption requests, among other matters.
The claim states that Cioffi told investors on an April 25 conference call that the fund had received "a couple of million" in redemption requests, when in fact Cioffi himself had redeemed $2 million, and he had received written notice from one of the fund's largest institutional investors, that it wanted to redeem $56 million.
The claim also includes several e-mail messages between Cioffi, Tannin and an unnamed third manager. In one, according to the claim "Tannin noted Cioffi's lack of buying discipline in a February 5, 2007 e-mail to the third manager, which read "Unbelievable. He is unable to restrain himself."
The claim also accuses Tannin of telling a Bear Stearns analyst on March 30, "believe it or not, I've been able to convince people to add more money."
The Bear hedge funds' demise were one of the first major symptoms of the credit crunch that has consumed markets since that time. Losses at the Bear funds led to wide losses at the firm, and eventually to a loss of investor confidence in it. The
in March rescued the firm, then on the brink of bankruptcy, by brokering a sale to
The arrests are the first criminal charges brought against Wall Street executives in relation to the collapse of the subprime mortgage market.