Former Bear Stearns Fund Managers Arrested
MIKE PESCA, host:
Yesterday morning, two former Bear Stearns hedge-fund managers, Ralph Cioffi and Matthew Tannin, were arrested in their homes in New York City and New Jersey. They are charged with misleading investigators about the health of two Bear Stearns hedge funds that collapsed about a year ago and cost investors 1.6 billion dollars. These guys, it is alleged, knew the funds were in grave condition and risk of collapse, but didn't tell investors or lenders. NPR's Dina Temple-Raston has been following the story, really, out in front of the story, let's say, and she joins us in the studio now. Hey, Dina.
DINA TEMPLE-RASTON: Good morning.
PESCA: So, you know, I mention there that these two hedge funds collapsed. Bear Stearns itself pretty much collapsed, right?
TEMPLE-RASTON: Exactly, although you can't say that these funds caused its collapse. There were problems that...
PESCA: Right. These funds were a small part of the Bear Stearns problem.
TEMPLE-RASTON: Of a larger Bear Stearns problem. They sort of highlighted the fact that there weren't a lot of risk controls, and there were management issues at Bear Stearns. So that started the snowball rolling.
PESCA: Mm-hm. Who were these two guys?
TEMPLE-RASTON: Well, Ralph Cioffi and Matthew Tannin were basically hedge-fund managers of a very risky fund that was mostly paid into by institutional investors and people who had tons of money, and what happened with these funds is that they had a lot of exposure to subprime mortgage-backed securities, and because of that, when the subprime market sort of fell off the roof...
TEMPLE-RASTON: They did, too.
PESCA: Now, so, can we then say - I'm sure their lawyers will say this, they were as much victims as anyone else?
TEMPLE-RASTON: Well, I mean, you know, of course their lawyers are going to say that.
TEMPLE-RASTON: But let's remember that worldwide, there's been 400 billion dollars in write-downs from these different investment banks and stock firms. So, the fact that they were caught on the wrong side of a trade, as were all these other banks, you have to put it in that context.
PESCA: So, in financial prosecutions, how it works is that the prosecutor said you were knowingly doing something bad and didn't follow rules, and the defense says, look, we lost money. We lost people's money, but that's how these markets go. We just made a mistake. What is the - you know, they had a big conference, a number of press conferences, did the FBI yesterday. What's their evidence that it was more than just an honest mistake, even if it was a calamitous, billion-dollar mistake?
TEMPLE-RASTON: Well, a lot of their evidence is based on emails, and if you actually read the 28-page indictment, it's also very clear that they talked to a lot of these investors who were very grumpy about having lost all their money.
PESCA: The federal authorities did, talked to these investors, yeah.
TEMPLE-RASTON: The federal authorities talked to these investors, and basically the investors said, hey, they told me this was a great deal, and meanwhile this was going on behind the scenes. Here's the problem, without sounding like I'm an apologist for these guys, but just to add a little - inject a little skepticism...
PESCA: Lay it out.
TEMPLE-RASTON: Everyone writes emails that they are - later hit themselves on the head for writing. You know, one of the guys, Tannin, actually wrote something like, I think we're toast. I think the funds are toast. And they're using this as evidence against him. Well, you know, at that time, the markets were incredibly volatile, and so, on Monday, you might well feel you are toast, and by Friday, you might actually feel like things are coming back again.
And there was that much volatility in the market. There was that much fear about what was happening with the mortgage-backed securities. So they sent this email on day one, let's say, and then talked to investors on day five, and didn't tell investors that they were worried. Is it - I'm not sure about hedge-fund rules. Apparently, because it is so opaque, you really have to be much more out there and tell your investors what it is that you're feeling and doing, and this may be where they hang these guys up.
PESCA: Well, if I were investing my millions of dollars in a hedge fund, and it was in mortgage securities, and the mortgage industry just took a huge hit, I would kind of want the guys running the fund not to say, don't worry, everything's great. You know, if they were expressing doubt amongst themselves, maybe that's the natural process of feeling out, you know, where the market's going, and that's the kind of thing you want. But what I wouldn't want - and I guess what they did is to turn around. They had their self-doubts, but the image they presented to their investors was a totally rosy picture.
TEMPLE-RASTON: They became salesmen, big-time salesmen.
PESCA: Yeah, yeah.
TEMPLE-RASTON: And if you look at the language, that's what it looks like. I mean, there's some more specific things that they did as well, in terms of they took some of their own money out of the funds, or said that they were putting more money in the funds and didn't do it. In one case, Ralph Cioffi actually had six million dollars in the fund.
He took two million out of the fund and put it in a different fund. His defense was that he was trying to shore up another fund that he actually had to manage as well, and if he was really liquidating his position, would you liquidate two million of your six million or would you try to liquidate as much of your six million if you could?
PESCA: Or - now I'll be the prosecutor - if he does six million, it looks terrible. If he does two million, at trial you could later say, well, I, you know, I was just trying to shore up another fund.
TEMPLE-RASTON: And he did go through the compliance group at Bear Stearns to do this.
PESCA: So he followed internal rules, but he didn't tell his investors?
TEMPLE-RASTON: He did not tell his investors that he had done that.
PESCA: And investors really want the guy managing the hedge fund to have skin in the game. Meanwhile it's my money and his money, that's very important to investors.
TEMPLE-RASTON: Right. He still had four million dollars in the fund, so it's - he didn't liquidate. This isn't like Enron, in which they were saying, hey, don't worry, everything will be great. Meanwhile, I'm trying to sell as much stock as I can while the price is still there.
PESCA: So there are all these email messages. What's the history of using email in terms of financial prosecutions?
TEMPLE-RASTON: Well, it's really funny, because when people talk about email and financial prosecutions, they always say these are the guys on words, these are really damming. But if you actually look back on the history of this, this is not a slam dunk. The problem with emails, and you know this if you write your own emails, they are taken out of context, and emails taken out of context often look much worse than, you know, an email that has the fullness of time with it. And I think that portraying this as a slam-dunk prosecution, I think we need to be a little bit more careful.
PESCA: The FBI director, Mueller, was out doing a press conference, and you were telling me that's kind of rare, actually.
TEMPLE-RASTON: Well, it's funny. The story about - I've been covering the FBI for awhile now, and the story that's always told about Mueller is that he's so press-adverse and so adverse to making headlines. He actually crosses out the words "I'm here to announce" whenever anybody gives him a speech. I mean, that's - he just wants to say what he needs to say and get out. So the fact that he was sort of being very bellicose yesterday, and that there wasn't just one press conference, there was a press conference in D.C., and then there was another repress conference in New York...
PESCA: And they made like 400 hedge fund or mortgage-related arrests.
TEMPLE-RASTON: They made - well, they sort of rounded up a number so that they could say, look, it's not just these high-level guys that we're focused on.
TEMPLE-RASTON: We're focused on the whole issue. I mean, the message yesterday was, hey, if you think we're just about terrorism, we're about more than that.
PESCA: And is that why they perp-walked the guys? In other words, gave the photographers that opportunity to...
TEMPLE-RASTON: Well, gave the photographers that opportunity, they actually told the photographers where to be and at what time.
PESCA: That's how you run a good perp walk.
(Soundbite of laughter)
PESCA: You know, Freud says sometimes a perp walk is just a perp walk, but do you read into it a little bit?
(Soundbite of laughter)
TEMPLE-RASTON: I didn't know Freud said that.
PESCA: Yeah. Freud commented on that. He was also - he also liked to watch "Law & Order" a lot.
TEMPLE-RASTON: Clearly, and "CSI." Well, yeah, sure, there's a message here, and the message that they were trying to send is that they were not just going to go after the penny-ante guys, the 400 guys that they announced yesterday, but they were going to go to all levels here, and they're sending a shot across the bow to people who may be working in the grey area of markets.
PESCA: Dina Temple-Raston, NPR's reporter on justice issues, out in front of this story. Thank you, Dina.
TEMPLE-RASTON: You're welcome.
PESCA: And that is - well, let's do a little New Movie Friday. That will be coming up in the next segment of the BPP, "The Love Guru," and "Get Smart." It's the Bryant Park Project from NPR News.