Two former hedge fund managers of Bear Stearns, Ralph Cioffi and Matthew Tannin, were arrested at their respective homes in New York, after a one year probe into the collapse of two hedge funds they were in charge of, according to the FBI. Cioffi was arrested at his home in Tenafly, New Jersey, and Tannin was picked up from his Manhattan residence. Both are expected to be indicted on securities fraud charges. Cioffi was the senior portfolio manager of both the funds and Tannin served as his chief operating officer. the name of the funds are 'Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd.' and the 'Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd.'

The SEC is likely to sue them for telling investors that the hedge fund was in good health when they already knew the funds were in deep trouble due to losses from investments in subprime mortgage securities. According to the Wall Street Journal, prosecutors are focusing on an email sent by Matthew Tannin to Ralph Cioffi where he says that he feared the market for complex bond securities in which they had invested was "toast." He suggested they discuss the possibility of shutting down the funds, according to the email, which was sent from Mr. Tannin's private account. This was four days before they assured investors that they were quite comfortable with their 'holdings'.

In addition, Cioffi had taken out $2 Million worth of his own money out of the fund in March 2007. UK's Barclay's Bank has filed a lawsuit against Bear Stearns, Cioffi and Tannin for persuading Barclay's to double its investment at the same time when Cioffi was withdrawing his own funds.

Update 1: The Wall Street Journal has a pdf copy of the indictment. Excerpt from Page 24 - In or about and between March 2007 and June 2007, both dates being approximate and inclusive, within the Southern District of New York and elsewhere, the defendants RALPH CIOFFI and MATTHEW TANNIN, together with others, did knowingly and intentionally devise a scheme and artifice to defraud the Funds' investors and to obtain money from them by means of materially false and fraudulent pretenses, representations and promises.

And this from Page 25, which shows that Tannin sent an email on March 15 2007 (around the time when he withdrew his $2 million) - Email from TANNIN to an investor, informing the investor that "I am adding money to the fund. If you guys are in a position to do the same I think think (sic) this is a good opportunity."

References:

http://online.wsj.com/article/SB121382160737185879.html

http://www.bloomberg.com/apps/news?pid=20601087&sid=aZjI.EgNDuFQ

http://www.reuters.com/article/marketsNews/idUSN1936756720080619

# posted by Admin @ 7:31 AM