Hedge Funds In Feds Crosshairs

Record losses from the subprime and credit crisis are now reaching toward the $400 billion mark, Fox Business News reports. As a result, hedge funds are being scrutinized and indictments have been handed down to two Bear Stearns hedge fund managers.

A senior law enforcement official said that hedge funds now sit at the top of the hit list of federal investigations into the subprime crisis, including at the Department of Justice and the Federal Bureau of Investigation. Expect more announcements of hedge fund indictments in coming days, sources say.

Federal authorities say Ralph Cioffi and Matthew Tannin, ex-managers of two now defunct hedge funds at Bear Stearns that at one point were worth a total of $20 billion, have surrendered in New York City.

The hedge funds went under in June of last year, costing investors an estimated $1.6 billion and kicking off the credit crisis. The two are alleged to have misled investors about the health of the hedge funds, which invested in risky subprime and credit securities. Bear Stearns lent one of the funds about $1.6 billion, and the loan was never fully paid back. The investment firm never recovered, and was eventually  subject to a Federal Reserve-orchestrated shotgun marriage with JPMorgan Chase.

Because of the record losses from the subprime and credit crisis, “regulators are under terrific pressure to look into hedge funds,” says Michael R. Young, a top securities lawyer at Willkie Farr & Gallagher, a white shoe law firm in New York City.

The two Bear Stearns hedge fund managers would be the highest level Wall Street executives to be charged in connection with the subprime and credit crisis to date. Details of the indictment are expected later today. A New York City grand jury is expected to return sealed indictments.