A week after two Bear Stearns hedge fund managers were arrested for allegedly misleading their investors, prosecutors are looking to add to the indictments, NPR has learned. The new charges — which could come as early as next week — would be related to their relationship with banks.
Officials close to the investigation told NPR that the U.S. Attorney's Office for the Eastern District of New York is pursuing additional indictments against Ralph Cioffi and Matthew Tannin. They pleaded not guilty to an initial round of charges which allege they misled investors about the financial health of two of their hedge funds. Now, investigators are gathering evidence on whether the two men purposely misled banks who were providing lines of credit and guarantees for the two funds in spring 2007. The funds had a great deal of exposure to bonds backed by subprime mortgages.
Officials have been speaking to representatives from Barclays, Merrill Lynch and Bank of America, among others. Barclay's has already sued the two fund managers in civil court. Sources say Bank of America was considering doing the same. Bank of America guaranteed and sold collaterized debt for Cioffi and Tannin's two funds. Officials there now say Cioffi and Tannin misled them.
Cioffi and Tannin are the highest-level Wall Street executives to be charged in connection with the mortgage crisis so far. On June 19, the two men were arrested and charged with conspiracy, as well as wire fraud and mail fraud. As first reported by NPR June 18, prosecutors said the men told investors that two of the funds they managed were in good shape, while privately telling colleagues they were worried about the funds' prospects.
Prosecutors used 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 — as evidence that they intended to mislead their investors. The two funds they managed 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 eventually was absorbed into JPMorgan Chase at fire-sale prices.
The U.S. Attorney's Office in New York declined to comment on the record about the case, as did the FBI and defense attorneys for Cioffi and Tannin.