Bear Stearns Execs Arrested

Two former Bear Stearns hedge fund managers are in custody after being charged with concealing problems that eventually led to the collapse of the funds. The demise of the two funds helped trigger the broader credit crisis.

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From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.

ROBERT SIEGEL, host:

And I'm Robert Siegel.

Two former Bear Sterns hedge fund managers were arrested today at their homes. The federal government has accused them of lying to investors when they knew that their funds were losing money. The collapse of the Bear Sterns funds helped trigger a broader crisis in the mortgage market. The fund managers were indicted on the same day the government announced a sweeping roundup of people being linked to mortgage fraud.

NPR's Chris Arnold reports.

CHRIS ARNOLD: The hedge fund managers are Matthew Tannin and Ralph Cioffi; they oversaw a hedge funds with investments that were tied to those subprime mortgages that turned out to be so bad. And now the fund manages are being charged with criminal fraud and conspiracy.

Mr. BEN CAMPBELL (U.S. Attorney): The funds collapsed last June, resulting in more than $1 billion in investor losses.

ARNOLD: That's Ben Campbell, the U.S. attorney in New York, bringing the case.

Mr. CAMPBELL: The defendants knew by March 2007 that both funds were in grave condition and at risk of collapse. Rather than disclosing the true state of the funds to investors and lenders, however, the defendants lied about the funds' condition, including their prospects, liquidity, and exposure to the subprime market.

ARNOLD: The indictment alleges that Matthew Tannin wrote in an e-mail to Cioffi that he thought the fund should be closed because, quote, "the entire subprime market is toast." But just a few days later, both men told investors that the hedge funds were in good shape and allegedly advised them to invest more money.

Mr. CAMPBELL: The defendants lied about what investors call skin in the game. Throughout March 2007, Tannin enticed investors to add additional money to the funds by claiming that he was doing so himself. He never did.

ARNOLDS: According to the indictment, Tannin wrote in an e-mail, quote, "Believe it or not, I've been able to convince people to add more money." Cioffi allegedly pull $2 million of his own money out of the funds without telling investors. Both men deny wrongdoing. An attorney for Cioffi said in a statement, quote, "We are shocked and disappointed that the government has seen fit to fix blame on these two decent men." Meanwhile, the case promises to be yet another one involving e-mails that defendants probably wish that they never wrote.

Mr. DAVID GRAIS (Lawyer): I shudder when I think back at some of the e-mails that I've written in unguarded or heated moments.

ARNOLD: David Grais is a private attorney who is preparing to sue investment banks on behalf of investors.

Mr. GRAIS: I think that the ease of sending e-mails just overcomes people's sense of caution. People think of it as akin to or phone call, whereas what it really is akin to is a letter to the editor.

ARNOLD: Or a letter to the prosecuting attorney's office. Still, some legal experts say the government will likely need more than the few e-mails they've pointed to so far to win this case. Also today, as a part of a broader probe, the Justice Department said that in recent months more than 400 people have been arrested in a mortgage fraud crackdown. Mortgage brokers and others were taken into custody. Scott Myers, a defense attorney in Chicago, says law enforcement is sending a message.

Mr. SCOTT MYERS (Lawyer): The government is looking to make a very dramatic and bold statement, that to the extent that there were problems in these markets they will find it, they will root it out, they'll punish the people responsible, and then they will fix it going forward.

ARNOLD: Myers says if prosecutors win the case against the Bear Stearns fund managers, that could pressure more people on Wall Street into cooperating with the government. But defense attorneys caution that prosecutors may overreach. Richard Strasburg is a former U.S. attorney from Manhattan who now defends white-collar cases.

Mr. RICHARD STRASBURG (Lawyer): The losses are staggering and there's a demand for consequences and heads to roll, so to speak. It becomes very dangerous that a person who was not saying something intentionally false and trying to lie and mislead people but said something that was wrong will find themselves on the side of a criminal indictment simply for making a mistake.

ARNOLD: A lot of private attorneys will be watching the case against the Bear Stearns fund managers. David Grais, for one, is very interested in when the Wall Street investment banks realized that the mortgage-related securities they were selling were garbage.

Chris Arnold, NPR News.

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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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