Former Bear Stearns Cos. managers Ralph Cioffi and Matthew Tannin are on the verge of criminal charges for securities fraud for mismanaging two Bear Stearns Cos. hedge funds, costing investors $1.6 billion in losses.
Federal prosecutors have suggested that Cioffi and Tannin could face indictment. “At issue is whether the managers intentionally misled investors by presenting a rosy picture of the funds at a time when they were privately communicating with colleagues about their worries over how the investment vehicles would ride out weakness in the mortgage market,” says Wall Street Journal reporter Kate Kelly.
Bear Stearns’ recent history of financial problems has raised concerns over its management abilities and risk controls. Bear Stearns invested large amounts of borrowed securities into bonds backed by subprime mortgages.
Despite the subsequent meltdown of mortgage-backed securities, Cioffi and Tannin remained optimistic about the subprime market. However, in May 2007, Bear Stearns was unable to repay its investors with cash and meet demands from lenders for additional cash, or margin calls. As a result, Bear Stearns lent $3.2 billion in order to recover its High-Grade fund only to see the funds file for bankruptcy protection a month later. Additional losses to the firm came from the bond market losses and investor panic.
The potential indictment of managers from Bear Stearns, now part of J.P. Morgan Chase & Co., could mark the beginning of more investigations dealing with the mortgage-market crisis, which began a year ago. More financial firms are taking precautions to provide more precise valuations on their holdings of mortgage securities.