NEW YORK—Two former Bear Stearns hedge fund managers were arrested and indicted on securities fraud charges on Thursday following a federal criminal probe into the collapse of two funds they oversaw.
The disintegration of the two funds helped kick off the credit crisis by stoking widespread fears about investments linked to risky subprime mortgage loans.
The former managers, Ralph Cioffi and Matthew Tannin, surrendered to officials and are expected to be arraigned later on Thursday on wire and securities fraud charges.
According to the indictment, the fund managers lied about the funds' prospects despite concerns over liquidity and the outlook for the market. The indictment also said one of the managers transferred a portion of his own investments from one of the funds, but did not tell investors about the move.
The crumbling of the two funds, the High Grade Structured Credit Strategies Master Fund and the Enhanced Master Fund, also spurred questions about the oversight and risk management operations at Bear Stearns, which was sold in March to JPMorgan Chase & Co in an emergency takeover deal brokered by the U.S. Federal Reserve.
Indictment
The indictment by a New York federal grand jury quoted Cioffi as telling Tannin on March 3, 2007 that "the worry for me is that subprime losses will be far worse than anything people have modeled." Soon after, he forecast a "meltdown" in the subprime sector and told a colleague he was "sick to my stomach" over the funds' March performance.
Nevertheless, the indictment said, Cioffi and Tannin promoted their funds as a buying opportunity.
"We have an awesome opportunity," Cioffi told a Bear Stearns broker with clients invested in the funds.
Tannin gave a similar message to the same broker and told investors he was going to add money to his own investments in the funds. But Tannin never did add money and Cioffi transferred $2 million of his $6 million investment in one of the funds to another Bear Stearns fund with a higher return and failed to tell investors who asked that he had done so, the indictment said.
In a statement, Cioffi's attorney Edward Little from law firm Hughes Hubbard and Reed said: "The subprime crisis took everyone by surprise, including the Fed and Treasury, and dozens of the largest financial institutions have lost over $300 billion to date on the same investments. Ralph Cioffi's funds lost money in exactly the same way. Because his funds were the first to lose might make him an easy target but doesn't mean he did anything wrong."
Susan Brune, an attorney at Brune & Richard LLP representing Tannin said: "Matt Tannin is innocent. He is being made a scapegoat for a widespread market crisis. He looks forward to his acquittal."
Charges
Securities and Exchange Commission charges are also expected to be unveiled at a news conference at 1:15 EST in which the U.S. Attorney for the Eastern District of New York and the FBI's New York Field Division will announce the filing of conspiracy and fraud charges against the two senior managers.
Cioffi and Tannin are expected to appear at Brooklyn federal court at 2 p.m. EST.
Cioffi met authorities at a prearranged location and Tannin surrendered after waiting for officials outside his residence, according to a person familiar with the matter.
Law officials escorted the two men in handcuffs past media and photographers outside New York's Federal Plaza building, where the FBI has its local offices.
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