Former Bear Stearns Cos. hedge-fund managers Ralph Cioffi and Matthew Tannin, acquitted in 2009 of criminal charges they misled investors who lost $1.6 billion, are set to face trial in February in a related civil case brought by the U.S. Securities and Exchange Commission.
A federal jury in November 2009 found Cioffi and Tannin not guilty of conspiracy and securities and wire fraud in the first criminal trial stemming from a federal probe of the collapse of the subprime-mortgage market. Cioffi, 55, was portfolio manager for the hedge funds and Tannin was their chief operating officer.
“We have had no discussions of substance,” John D. Worland, a lawyer for the SEC, told Block when the judge asked about the possibility of a settlement, which would make a trial unnecessary.
Kevin Callahan, an SEC spokesman, and Marc Weinstein, a lawyer for Cioffi at Hughes Hubbard & Reed LLP in Manhattan, declined to comment on the case. Nina Beattie, a lawyer for Tannin at Brune & Richards LLP in Manhattan, also declined to comment.
Cioffi and Tannin were indicted in June 2008, a year after their hedge funds failed. Bear Stearns collapsed less than a year after the funds failed, and was purchased by New York-based JPMorgan Chase & Co. (JPM)
The SEC claims the two men misled investors about the funds’ deepening financial troubles and their own holdings in the investment pools. The regulator’s case requires a lower standard of proof than a criminal conviction.
According to the government, Cioffi and Tannin conspired to defraud their clients by publicly touting the health of the funds, made up mostly of subprime mortgage-backed securities.
The hedge funds, which filed for bankruptcy in July 2007, were 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.
The two hedge funds failed when prices for collateralized debt obligations linked to home loans fell amid rising late payments by borrowers with poor credit or heavy debt.
The men claimed in e-mails and conversations to be adding their own money to the funds in the months immediately prior to their collapse, according to the government. Neither man added any money to the funds, once valued at $20 billion, the U.S. alleged.
The defense in the criminal trial argued Cioffi and Tannin were innocent of any wrongdoing and had remained honestly optimistic about the funds’ health.
Jurors interviewed after the verdict in the criminal case said Cioffi and Tannin had worked to save the funds and that e-mails presented by the government as evidence both went against and favored the defendants.
Both men were charged with one count of conspiracy to commit securities fraud, two counts of wire fraud and two counts of securities fraud. Cioffi was charged with one count of insider trading, stemming from his transfer of $2 million -- one-third of his holdings in the funds -- to another Bear fund he supervised that was profitable.
They were acquitted of all the charges.
The civil case is Securities and Exchange Commission v. Cioffi, 08-cv-2457, and the criminal case is U.S. v. Cioffi, 08- CR-00415, U.S. District Court, Eastern District of New York (Brooklyn).
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