Former Bear Stearns Cos. hedge-fund managers Ralph Cioffi and Matthew Tannin, acquitted in 2009 of criminal charges they misled investors, agreed to pay $1.05 million to settle a related civil case brought by the U.S. Securities and Exchange Commission.
Cioffi agreed to pay $800,000 and accept a three-year ban from the securities industry and Tannin agreed to a two-year ban and $250,000 payment, SEC attorney John Worland told U.S. District Judge Frederic Block in Brooklyn, New York, in a hearing today.
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. Cioffi, 56, was portfolio manager for the hedge funds. Tannin, 50, was their chief operating officer. The government said investors lost $1.6 billion.
“This case is being settled for, relatively speaking, chump change,” Block said at the hearing, adding that he was “inclined to sign off on it.” He asked lawyers for both sides to file more papers by next week.
The SEC’s lawsuit, alleging the two men misled investors about the funds’ deepening financial troubles and their own holdings in the investment pools, was set to go to trial today.
After the hearing, Cioffi’s lawyer, Edward Little of Hughes Hubbard & Reed LLP, and Tannin’s lawyer, Nina Beattie of Brune & Richard LLP, declined to comment on the case. Cioffi and Tannin weren’t in court today.
Cioffi’s payment includes having to give up $700,000 in illegal gains and pay a $100,000 penalty. Tannin’s includes disgorgement of $200,000 and a $50,000 penalty.
“These serious sanctions reflect the defendants’ misconduct, their ill-gotten gains and other considerations, which we will set forth in the written submissions requested by the court,” John Nester, an SEC spokesman, said in an e-mailed comment.
The two money managers 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.
According to their indictment, Cioffi and Tannin conspired to defraud 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 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 added any money to the funds, once valued at $20 billion, the U.S. charged in the criminal case.
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 handing down not-guilty verdicts on all the charges, said they believed Cioffi and Tannin had worked to save the funds. E-mails presented by the government as evidence of wrongdoing could be looked at as both favoring and implicating the defendants, the jurors said.
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).