Indictments Loom in Bear Stearns Case

Grand jury indictments are anticipated for two Bear Stearns hedge fund managers who were taken into custody Thursday. It will be the first time Wall Street executives have been charged with crimes related to the subprime mortgage crisis.

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RENEE MONTAGNE, host:

The subprime mortgage crisis has shaken financial markets around the world. It's rattled the American housing market, and now it appears the first criminal charges against Wall Street executives are imminent. Two former managers at Bear Stearns are expected to be charged later today. Both were already arrested earlier this morning. Prosecutors say the men misled investors by painting a rosy picture of their funds' prospects while privately worrying about a downturn in the subprime mortgage market.

NPR's Dina Temple-Raston is covering this story, and she joins us from our New York bureau. Good morning.

DINA TEMPLE-RASTON: Good morning.

MONTAGNE: Tell us who these men are and what the charges against them might be.

TEMPLE-RASTON: Well, Ralph Cioffi and Matthew Tannin ran these two hedge funds for Bear Stearns and had a lot of exposure to mortgage-backed securities. Prosecutors are looking at emails the two men wrote, particularly in the spring of 2007. That's when Tannin expressed concern about the credit markets and how a downturn might affect investors in this fund he was running. Then a short time after Tannin expressed his reservations, he and Cioffi told investors that they were cautiously optimistic about being able to prevent the widespread losses in the portfolio. And that's where the problem is.

MONTAGNE: And how big is this, having them actually charged with criminal acts?

TEMPLE-RASTON: Well, there's been a steady drumbeat coming out the FBI for months about the subprime mortgage debacle and how they were going to hold people accountable. In January, they announced that they were investigating more than a dozen Wall Street firms on everything from suspicion of fraud to improper bundling of loans and even insider trading.

Now until now, there was just a lot of speculation about who they intended to go after. I think most people assumed they were going to go after mortgage lenders, you know, those guys who were putting fake information on mortgage applications or using straw buyers. But these indictments raise the ante.

Ralph Cioffi and Matthew Tannin were long-time Bear Stearns employees. They had good reputations. They had a lot of experience in the mortgage market. So suddenly having them brought up on charges has sent this shiver through Wall Street, and everyone's a little worried about who's going to be next.

MONTAGNE: Now Enron comes to mind in hearing about this, where executives were telling employees not to worry while they were dumping their own stocks. Were these two men selling their own stakes in the funds?

TEMPLE-RASTON: Well, the FBI is looking at one transaction in particular. Last February, apparently, Cioffi asked for permission from Bear Stearns compliance officials to move $2 million of the $6 million he had invested in this hedge fund into a separate account. And it's unclear whether investigators are alleging this meant Cioffi was liquidating his position in the fund while assuring investors that there was no need to worry, or whether it was something else all together. I mean, Cioffi's told prosecutors that he was just shoring up another hedge fund with his own money, and there was nothing nefarious in it.

MONTAGNE: And do you know what happens next?

TEMPLE-RASTON: Well, as you mentioned earlier, Cioffi and Tannin were both arrested this morning. Apparently, they were permitted to walk out of their separate residences, and then they were placed under arrest by the FBI. Basically, what's going to happen now is they're going to be processed at FBI headquarters and transferred to the courthouse. And you remember those perp walks from a couple of years ago when we had CEOs who were being accused of using corporate money for their own purposes, like Tyco's former CEO Dennis Kozlowski? They were doing perp walks. We're going to see the same sort of thing, I suspect, today. There'll be reporters there to capture their transfer from the FBI headquarters to the courthouse.

MONTAGNE: Thank you.

TEMPLE-RASTON: You're welcome.

MONTAGNE: NPR's Dina Temple-Raston, speaking to us from New York.

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Bear Stearns Hedge Fund Managers Charged

A man walks out of Bear Stearns headquarters in New York. i

A man walks out of Bear Stearns headquarters in New York in March. Last month, shareholders approved the investment bank's sale to JPMorgan Chase & Co. Chris Hondros/Getty Images hide caption

itoggle caption Chris Hondros/Getty Images
A man walks out of Bear Stearns headquarters in New York.

A man walks out of Bear Stearns headquarters in New York in March. Last month, shareholders approved the investment bank's sale to JPMorgan Chase & Co.

Chris Hondros/Getty Images

Two former Bear Stearns hedge fund managers were arrested Thursday morning. They will be arraigned later Thursday on charges of securities fraud as part of a yearlong federal investigation into the mortgage crisis, officials close to the investigation told NPR.

Matthew Tannin and Ralph Cioffi are the highest-level Wall Street executives to be charged in connection with the mortgage crisis so far.

As first reported by NPR Wednesday, prosecutors allege the men told investors that two of their funds were in good shape, while privately telling colleagues they were worried about the funds' prospects.

Prosecutors are zeroing in on e-mail traffic between the two men in which they fretted about the downturn in the mortgage market only days before telling investors all was well.

The two funds had a high level of exposure to bonds backed by subprime mortgages. They eventually collapsed, and their investors lost about $1.6 billion.

The collapse of the hedge funds in June 2007 — coupled with questions about Bear Stearns management and oversight — threw the firm into a severe liquidity crisis. The Federal Reserve intervened and there was a shotgun wedding of sorts with JPMorgan Chase & Co.

Bear Stearns was eventually absorbed into JPMorgan Chase at fire-sale prices. The two funds' collapse also led investors to question how big firms were valuing their mortgage-backed securities. Firms have written off some $400 billion worldwide in mortgage-related losses.

The U.S. attorney's office in New York declined to comment on the case, as did the FBI and defense attorneys for Cioffi and Tannin. FBI Director Robert Mueller and Deputy Attorney General Mark Filip were to hold a news conference in Washington, D.C., on Thursday afternoon, and New York's U.S. attorney was expected to speak to reporters in New York City.

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