TWO FORMER Bear Stearns hedge fund managers were yesterday indicted on federal charges that they intentionally misled investors about the financial condition of the investment vehicles that collapsed last year.
In an indictment unsealed yesterday, Ralph Cioffi and Matthew Tannin, who ran two high-profile hedge funds for the US bank, were accused of telling investors that the funds were an "awesome opportunity" and of attempting to attract more money into the funds even as they were privately discussing concerns about the funds' prospects. Mr Cioffi also allegedly transferred about $2 million of his own investment from one of the funds into another fund and did not tell investors.
The men ran two high-profile hedge funds at Bear Stearns's asset management unit which lost big bets on subprime mortgage-backed securities and imploded in June last year, losing investors $1.6 billion. According to their lawyers, the two said they were innocent and planned to contest the charges. An attorney for Mr Cioffi said: "The subprime crisis took everyone by surprise . . . 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, attorney for Mr Tannin, said: "Mr Tannin is being made a scapegoat for a widespread market crisis."
The criminal charges - the first against Wall Street executives to stem from the credit crisis - are likely to raise questions about the way banks and other companies communicated to investors.
The federal indictment claimed: "Rather than disclosing the true state of the funds to investors and lenders . . . Cioffi and Tannin agreed to make misrepresentations in the ultimately futile hope that the funds' bleak prospects would change and that their incomes and reputations would remain intact."
The collapse of the funds was a blow for Bear in a battle for survival that eventually saw it sold to JPMorgan Chase in March.
Todd Harrison, a former federal prosecutor, said the case "shows the government is ramping up efforts to thoroughly uncover what went wrong with the subprime debacle".
