Ralph Cioffi’s $2 million redemption from a hedge fund and Matthew Tannin’s $750,000 retention bonus were used to determine how much the ex-Bear Stearns Cos. hedge- fund managers would pay to settle a securities-fraud lawsuit by the U.S. Securities and Exchange Commission, the agency said.
Cioffi’s disgorgement of $700,000 reflects losses he avoided by redeeming $2 million from a Bear Stearns fund in 2007 without telling his investors, the SEC said in a letter yesterday to U.S. District Judge Frederic Block in Brooklyn, New York, who must approve the settlement. Tannin agreed to give up $200,000 in ill-gotten gains, reflecting part of a $750,000 bonus he received in 2007 for helping the company unwind the portfolios of its failed funds, the SEC said.
“The proposed settlements here are fair, adequate and reasonable,” SEC lawyers John D. Worland Jr. and Richard Hong wrote. Lawyers for Cioffi and Tannin also filed a letter yesterday supporting the settlements, which include fines of $100,000 for Cioffi and $50,000 for Tannin.
In November 2009, a federal jury 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. The men managed two hedge funds that filed for bankruptcy in July 2007.
In addition to the criminal case, the SEC filed a related civil suit. The parties told Block of their proposed settlement on Feb. 13, the day the case was supposed to go to trial.
The SEC alleged the two men misled investors about the funds’ deepening financial troubles and their own holdings in the investment pools. Block, who requested that the lawyers’ submit the letters before he rules, had asked why the settlement was relatively small compared to the $1.8 billion the SEC said the funds’ investors lost.
The SEC can obtain only disgorgement of ill-gotten gains and civil penalties, not typically damages, Worland and Hong said. The disgorgement amounts were within the range of what they probably would recover if they tried the case, they said.
“Proof of losses by victims of a defendant’s securities fraud is not an element of an SEC enforcement action,” the SEC lawyers wrote.
Cioffi and Tannin were indicted in June 2008, a year after their hedge funds failed. Bear Stearns collapsed less than a year later and was bought by New York-based JPMorgan Chase & Co. (JPM)
The case is Securities and Exchange Commission v. Cioffi, 08-cv-2457, U.S. District Court, Eastern District of New York (Brooklyn).
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