The U.S. Securities and Exchange Commission is considering a proposed settlement with two former Bear Stearns Cos. (2942331Q) portfolio managers to resolve a case that has been pursued by federal securities regulators for more than three years, three people familiar with the matter said.
Ralph Cioffi and Matthew Tannin, who managed the Wall Street firm’s two largest hedge funds, are scheduled to stand trial on Feb. 13 over SEC civil claims that they deceived their own investors about their funds’ subprime mortgage exposure, causing losses of about $1.6 billion when the funds collapsed in July 2007. SEC commissioners were scheduled to vote on a proposed agreement in a closed meeting today, the people said without providing details of the deal.
Cioffi and Tannin gained attention in November 2009 when a federal court jury found them not guilty in a related criminal trial, the first stemming from a U.S. probe of the collapse of the subprime-mortgage market. Cioffi, 56, was senior portfolio manager for the funds and Tannin, 50, was chief operating officer.
The hedge funds filed for bankruptcy in July 2007 after collateralized debt obligations linked to risky home loans began to sour. Bear Stearns collapsed less than a year later and was purchased by New York-based JPMorgan Chase & Co.
The two men misrepresented the funds’ deteriorating condition and the level of investor redemption requests as they sought to bring in new money and keep existing investors from withdrawing funds, the SEC said in its complaint. They also exaggerated their own investments in the funds while using their personal stakes as a selling point, the SEC said.
Cioffi and Tannin have contested the SEC’s claims for more than three years in U.S. District Court in Brooklyn, New York. They argued in a December filing that, under a U.S. Supreme Court (1000L) ruling involving Janus Capital Group Inc. (JNS), they can’t be held liable for alleged misstatements in monthly reports to investors because they only assisted in preparing the documents.
The Janus decision in June of last year said a person must have ultimate authority or control over misstatements to be held liable for them.
In the criminal trial, prosecutors highlighted e-mails they said showed Cioffi and Tannin touting the funds while bemoaning their failure privately. The jury took nine hours to find the two men not guilty on all six criminal counts. After the verdict, some jurors said the two men may have been genuinely optimistic about the funds’ prospects and that prosecutors had cherry-picked parts of the messages that appeared incriminating.
The proposed settlement being weighed by SEC commissioners today would still need to be approved by U.S. District Judge Frederic Block in Brooklyn.
John Nester, an SEC spokesman, declined to comment, as did Nina Beattie, an attorney for Tannin at Brune & Richard LLP. Phone calls to and Edward Little and Marc Weinstein, lawyers for Cioffi at Hughes Hubbard & Reed LLP, weren’t immediately returned.
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