Two Bear Stearns executives were arrested as a result of a nine-count indictment alleging the duo participated in misleading investors on the health of the hedge funds they ran.
At the core of the case is an email sent from Matthew Tannin to Ralph Cioffi, where Tannin supposedly reveals he and Cioffi knew the two funds were in trouble, but communicated to investors they were in stable shape.
On April 22, Tannin sent the email to Cioffi saying, "If we believe the [collateralized-debt obligation report] is anywhere close to accurate I think we should close the funds now. The reason for this is that if [the CDO report] is correct then the entire subprime market is toast. If AAA bonds are systematically downgraded then there is simply no way for us to make money -- ever. ... Caution would lead us to conclude the [CDO report] is right -- and we're in bad bad shape."
The quote from the email cited above is listed in the indictment.
Where the problem for Tannin and Cioffi come in is when they and other executives from Bear Stearns met with investors several days later on April 25, they asserted the funds were very liguid, and could survive any problems that may come in the future.
In another email from Tannin to a different person, he made it look like he was surprised that he was able to convince people to continue investing in the funds. "Believe it or not -- I've been able to convince people to add more money," he is said to have written.
The two hedge funds involved in the indictments are the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd. and the Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd. There was little, if any money, investors were able to recover once they both collapsed.
Charges in the indictment were for the most part related to fraud and conspiracy. You can read the full indictment here.
Attorneys representing the Tannin and Cioffi say they are confident the two will win the case, as the cause of the downfall of the funds was market conditions, not criminal activity.
J.P. Morgan Chase & Co (NYSE:JPM) has since acquired Bear Stearns.
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