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U.S. Says It Has ‘Proof’ of Crimes by Cioffi, Tannin


Date: Tuesday, September 29, 2009
Author: Patricia Hurtado, Bloomberg

Prosecutors said they have “direct proof” that former Bear Stearns Cos. hedge fund manager Ralph Cioffi used his investment in a fund he controlled to lie to a bank and obtain a $4.2 million line of credit for a condominium development project.

Cioffi, 53, is set to go on trial next month with another former Bear Stearns hedge fund manager, Matthew Tannin, 47, for an alleged fraud that helped bring down the securities firm in 2007. The government said the 2006 Florida development deal was in danger of foreclosure and is also further evidence of Cioffi’s motive to lie about his management of the fund and later engage in insider trading, according the indictment.

The government said it seeks to introduce newly developed evidence that Cioffi knew Bear Stearns officials told him he couldn’t encumber his holdings in one of two funds he controlled and did so without their approval. The U.S. seeks to introduce this evidence in the Oct. 13 trial before U.S. District Judge Frederic Block in Brooklyn, New York.

“The government asserts that the proffered evidence is direct proof of the charged crimes,” prosecutors said Sept. 25 in court papers. “This proof will demonstrate that Cioffi and Tannin used Cioffi’s investment in the High Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd. to lie to Busey Bank to secure a $4.25 million line of credit,” they said.

Prosecutors ‘Misrepresented’

Both Cioffi and Tannin pleaded not guilty to the charges and denied any wrongdoing regarding the loan.

Margaret Keeley, a lawyer for Cioffi, didn’t immediately return a voice-mail message left at her office seeking comment on the latest filing. Susan Brune, a lawyer for Tannin, wasn’t immediately available for comment. Andrew Merrill, a spokesman for Tannin, didn’t have an immediate comment.

In court papers filed last week, Keeley said prosecutors had “misrepresented” the facts surrounding the Florida bank agreement. Keeley said Cioffi had obtained authorization from his Bear Stearns superiors for the condominium loan.

In a separate Sept. 25 filing, prosecutors asked Block to schedule a hearing to question Tannin about his lawyer, Nina Beattie, saying she might be called as a witness in the case regarding deleted e-mails in a Gmail account that belonged to Tannin.

The U.S. said the messages were erased after a federal subpoena was issued to preserve documents after regulators started an investigation of the fund. Prosecutors said Tannin should be asked if he agrees to waive any potential conflicts.

Foreclosure

Prosecutors said they learned more information from Bear Stearns witnesses who said Cioffi didn’t get permission from them to encumber his holdings in the fund after he learned his multimillion-dollar building project in Florida faced a Nov. 13, 2006, foreclosure deadline.

Tannin contacted Bear Stearns on Cioffi’s behalf on Nov. 6 seeking approval from their superiors, prosecutors said in the court papers. Bear Stearns’s general counsel advised Tannin that Cioffi would have to go through a compliance process before approval could be given.

“In times of difficulty, we prohibit managers from removing their investment in favor of clients going first,” the general counsel, who wasn’t named by prosecutors, wrote Tannin. “This pledge arrangement has the potential to interfere with that if there was a problem and the bank seized the assets at an inopportune time.”

Request Denied

A person identified as the “global head” or the direct supervisor for both defendants, told Cioffi on either Nov. 14 or Nov. 15, that he wouldn’t approve the loan pledge, saying it would have to be disclosed to fund investors.

Tannin later obtained a subordinate manager’s approval for Cioffi’s pledge and the agreement has four signatures, with Tannin signing on behalf of the fund and only a lower-level manager signing on the firm’s behalf.

Tannin e-mailed another Bear Stearns attorney on Nov. 29, inquiring whether the lawyer was “cool with” a draft pledge agreement.

“Neither Tannin nor Cioffi advised the attorney that Bear Stearns Asset Management had expressly denied the pledge on or about Nov. 14, 2006,” Assistant Brooklyn U.S. Attorney James McGovern said.

Tannin also claimed in the agreement that Busey Bank’s interests were registered with Bear Stearns, which was never done, prosecutors said.

The U.S. said the Florida project provides “relevant background evidence to complete the story of the crimes charged” and “the relationship of trust” between Cioffi and Tannin.

Never Registered

On April 1, 2007, Cioffi, without telling Bear Stearns, redeemed $2 million of his investment that was still encumbered by the Busey Bank pledge. The following July 23, Cioffi advised Busey Bank that its security interest in the Enhanced Fund was “worthless,” the U.S. said.

Prosecutors submitted the filings to Block, seeking to introduce evidence of a series of what they called “uncharged crimes,” including his alleged attempt to use his holdings in the fund as collateral for the Florida condominium project.

Cioffi, who managed the two funds, is also charged with insider trading for the April 2007 redemption from the Bear Stearns Enhanced Fund, one-third of the amount he had invested in the funds. The government asserts Cioffi relied on nonpublic, material information to make the withdrawal and save his investment before both funds collapsed.

Insider Trading

Last July, the judge rejected Cioffi’s request to throw out the insider-trading charge on claims that he didn’t owe a duty to his clients as a hedge fund manager.

Cioffi, now with Tenafly, New Jersey-based RCAM Capital LP, and Tannin face as many as 20 years in prison if convicted of conspiracy to commit securities fraud. Cioffi faces an additional 20-year term if found guilty of insider trading.

The case is U.S. v. Cioffi, 1:08-cr-00415, U.S. District Court, Eastern District of New York (Brooklyn).

To contact the reporter on this story: Patricia Hurtado in federal court in Brooklyn, New York, at pathurtado@bloomberg.net.