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Bear Stearns’ Hedge Fund Mangers Arrested

Matthew Tannin and Ralph Cioffi, former Bear Stearns’ hedge fund managers, were taken into custody at their homes Thursday morning. They are facing criminal charges due to the collapse of the subprime mortgage market and the resulting implosion of the two hedge funds they managed.  

Both former executives are accused of deceiving investors about the risk of their investments in subprime mortgages. The principal question is what did they really know when they presented the funds as promising investments.  

The prosecutors look to rely heavily on private emails.  According to the Wall Street Journal, the two allegedly sent emails implying the funds they invested in were about to crash four days before they told their investors they were confident in these funds. Tannin supposedly told Cioffi he thought the market they invested in was “toast” and wanted to shut down the funds.  

“The arrests are appropriate given the magnitude and the egregiousness of their alleged misconduct,” said attorney Steven Caruso, who is representing investors in arbitration cases against these funds.  

Their arrests are the first of possible fraud cases by banks and mortgage firms whose investments in the subprime market decreased in value. The market’s losses are now totaling around $396.6 billion. The current indictments may lead to several other criminal cases and civil suits in the future. 

Bear Stearns’ termination should have been predicted when the Federal Reserve intervened early this year to bail out the bank after the hedge funds collapsed. This collapse added fuel to the fire for the recent credit crisis. It was proof that the market could critically impair the companies that bought and resold these loans.  

Tannin and Cioffi were brought up in lawsuits last year by hedge fund investor, Barclays Bank, claiming they were purposely misled. Barclays stated Bear Stearns’ knew for months the assets in its Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund had decreased in cost since their original value.  Barclays reported that the email from Tannin said the fund is “having our best month ever.” But, at the time the fund was actually having “severe liquidity problems, and lost hundreds of millions of dollars.”  The funds failed despite Cioffi and Tannin’s positive evaluations , resulting in over $20 billion in assets to crash.

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