Smoking gun email leads to indictment of subprime hedgefund managers

Washington Post:

Two former Bear Stearns Cos. hedge fund managers were arrested today and charged with fraud for their part in the collapse of the investment funds that helped usher in the financial crisis resulting from the meltdown of the subprime mortgage market. They were the first top Wall Street executives to face criminal charges in connection with the crisis.

Federal agents arrested Ralph Cioffi, 52, and Matthew Tannin, 46, at their New York-area homes before marching them in handcuffs to their arraignment in federal court in Brooklyn, where they were formally charged with mail fraud, wire fraud and conspiracy. The charges capped nearly a year-long investigation into their management of the hedge funds.

The indictment alleges that the two men misled investors by offering upbeat assessments of the fiscal health of two Bear Stearns hedge funds, even as they harbored deep personal doubts about their viability. Cioffi was also charged with insider trading, for allegedly moving $2 million of his personal money out of one of the funds, which was invested heavily in mortgage securities, and into a better performing fund. The two men face as much as 20 years in prison if convicted of the most serious charges.

In a separate civil complaint, the Securities and Exchange Commission alleges that in the first five months of 2007, Tannin and Cioffi "deceived their own investors, as well as the fund's institutional counterparts, by fraudulently concealing from them the full extent of the fund's deepening troubles."

Both the indictment and SEC complaint cite e-mails from the two men. In one, written in April 2007, just two months before the funds imploded, Tannin says to Cioffi: "[T]he subprime market looks pretty damn ugly. . . . If we believe [our internal modeling], is ANYWHERE CLOSE to accurate I think we should close the funds now. The reason for this is that if [our internal modeling] is correct then the entire subprime market is toast."

The indictment could well be followed by others, as federal officials announced today at a press conference that they are conducting 19 corporate fraud investigations of firms that had a role in the subprime debacle. "The majority of these corporate fraud investigations address accounting fraud, insider trading and, with criminal intent, the failure to disclose the proper valuation of the securitized loans and derivatives," said FBI Director Robert S. Mueller III.

Lawyers for the two indicted men said that the men were caught off guard by the collapse of the subprime market.

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Those lawyers better reread that email and come up with a better defense or these guys are in real trouble. If they were telling investors the opposite of what they were telling each other that sort of defines a violation of securities fraud. They may also have some fiduciary issues with their former employer too.