SEC charges two ex-Bear Stearns hedge fund managers with fraud

Date: Friday, June 20, 2008
Author: James Langton, Investment Executive

U.S. regulators and law enforcement brought charges against two former portfolio managers from Bear Stearns Asset Management over the collapse of their hedge funds last summer.

The US Securities and Exchange Commission charged the fund managers with misleading investors about the financial state of the firm’s two largest hedge funds, and their exposure to subprime mortgage-backed securities, before the collapse of the funds in June 2007.

The SEC’s complaint alleges that when the hedge funds took increasing hits to the value of their portfolios during the first five months of 2007 and faced escalating redemptions and margin calls, then-BSAM senior managing directors Ralph Cioffi and Matthew Tannin deceived their own investors and certain institutional counterparties about the funds’ growing troubles until they collapsed and caused investor losses of approximately US$1.8 billion.

In a related criminal action today, the U.S. Attorney’s Office for the Eastern District of New York announced the indictment of Cioffi and Tannin on conspiracy and fraud charges.

None of these allegations have been proven.

“Hedge fund managers owe serious obligations to investors in their funds, and the commission will be unyielding in its commitment to vigorous investor protection by enforcing the securities laws against them whenever warranted,” said SEC chairman Christopher Cox. “Hedge funds are by no means unregulated when it comes to fraud. Those who commit fraud at the expense of investors will always be the target of a relentless SEC.”

In its complaint, the commission seeks permanent injunctive relief, disgorgement of all illegal profits plus prejudgment interest, and the imposition of civil monetary penalties.

The SEC added that its Enforcement Division’s subprime working group is aggressively investigating possible fraud, market manipulation, and breaches of fiduciary duty that may have contributed to the recent turmoil in the credit markets.