Q&A: Inside the Bear Stearns Indictments

The FBI on Thursday indicted two former hedge fund managers at Bear Stearns on charges that they concealed problems that eventually led to the collapse of the funds.

Both funds had sizable exposure to subprime mortgages, and their demise last year helped trigger the broader credit crisis roiling the financial community. The former Bear executives, Matthew Tannin and Ralph Cioffi, are both in custody now. Here, a look at the case against them:

What did Tannin and Cioffi do at Bear Stearns?

Cioffi was the founder and senior portfolio manager of two funds. Matthew Tannin worked for Cioffi and was also a manager of the funds.

What did they allegedly do?

The FBI alleges that Tannin and Cioffi misled investors about the stability of the funds they managed. The indictment charges the men with conspiracy and fraud. Cioffi is also charged with insider trading.

Their funds' collapse lost investors about $1.6 billion and contributed to the very rapid meltdown of Bear Stearns. The investment firm, one of Wall Street's oldest, was bought by JPMorgan Chase for a fire-sale price in March.

What kind of evidence does the government have against Tannin and Cioffi?

Much of the government's evidence comes in the form of personal e-mails written by Cioffi and Tannin. The two told investors — and told others to tell investors — that they put their personal money into the funds they managed.

Even as their funds' gains started to flatten or fall, Cioffi and Tanning told members of their team not to discuss difficulties it was having. According to the indictment, on March 3, 2007, Cioffi told Tannin, "The worry for me is that sub prime losses will be far worse than any thing people have modeled." Later, he said to a colleague, "I feel sick to my stomach over our performance in [M]arch."

But subsequently, according to the indictment, the two urged investors to put more money into the funds. Tannin told prospective investors he would be adding more of his personal money into the funds as well. (According to the indictment, Tannin never added his own money to the funds.) Then, later, Tannin wrote in an e-mail, "Believe it or not, I've been able to convince people to add more money."

In mid-April 2007, as things continued to worsen, Cioffi took $2 million of his $6 million in personal investments and transferred them to another Bear Stearns hedge fund, without telling investors, the indictment alleges. That same month — despite ongoing e-mail exchanges in which they shared dire assessments of the state of their funds — Tannin and Cioffi told senior Bear Stearns personnel they believed the funds were "in good shape and would continue to be successful," according to the indictment.

How did the former hedge fund managers respond to the allegations?

Tannin's and Cioffi's attorneys said their clients are innocent. They said the scope of the subprime collapse was a surprise to everyone, including the Federal Reserve and the U.S. Treasury. Their lawyers said they are targeted as scapegoats for the government.

Has anyone else at Bear Stearns or other Wall Street firms been charged?

Tannin's and Cioffi's arrests are part of a sweeping FBI investigation into the mortgage crisis. The two men are the highest-level Wall Street executives to be charged in the probe so far.

The Bear Stearns charges were part of an ongoing federal investigation into the mortgage crisis. What's the scope of the probe?

"Operation Malicious Mortgage" was launched a year ago and involves the FBI, the Justice Department and other state and federal agencies. The probe is focused on lending fraud, foreclosure rescue scams, and mortgage-related bankruptcy schemes. These included fraud that involved falsified income and employment documents, inflated property assessments, and schemes designed to defraud homeowners facing foreclosure.

Who else has the FBI arrested for mortgage fraud?

The FBI says it has arrested more than 400 real estate professionals in connection with its investigation into mortgage fraud since March.

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