Ex-Bear Stearns Fund Managers Cioffi, Tannin Seek Narrowing of SEC Suit
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, asked a federal judge to toss out part of a related civil case brought by the U.S. Securities and Exchange Commission.
Cioffi and Tannin, in their request to U.S. District Judge Frederic Block in Brooklyn, New York, said they can’t be sued for statements they didn’t make and over so-called scheme liability. The request, made in October, was made public yesterday.
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, 55, was portfolio manager for the hedge funds. Tannin, 50, was their chief operating officer.
“Despite the complete acquittal of Mr. Cioffi and Mr. Tannin, the SEC has persisted in pursuing this action based on the same underlying facts,” lawyers for the men wrote in the filing.
The SEC opposed the motion in a November filing, also made public yesterday. The regulator’s case requires a lower standard of proof than a criminal conviction. Block has set a Feb. 13 trial date for the SEC suit.
Supreme Court Ruling
Cioffi and Tannin said that, under a June U.S. Supreme Court ruling involving Janus Capital Group Inc., they can’t be held liable for alleged misstatements in monthly reports to investors because they only assisted in the documents’ preparation.
“Mr. Cioffi and Mr. Tannin did not have ultimate authority or control over the content or communication of the” reports, they wrote.
In addition, no evidence in the case shows any of the deceptive conduct required for the SEC to prove a scheme to defraud investors, the men said. The agency’s allegation that they misled lenders to the funds also doesn’t amount to a scheme to defraud, they said.
“There can be no dispute that Cioffi and Tannin were the ‘makers’” of the misstatements in the documents to investors, the SEC said in its response.
It also said Cioffi and Tannin are wrong that a scheme to defraud doesn’t include one based on misrepresentations without a “deceptive act.”
In 2006, the men made “a huge bet” on subprime mortgages that turned against them with the downturn of the housing market, the SEC said.
“Cioffi and Tannin attempted to conceal these poor investment decisions from existing and new investors in the funds, as well as from financial institutions that served as counterparties,” the agency wrote.
The two money managers 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.
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 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 Stearns fund he supervised that was profitable.
The two men 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).
To contact the editor responsible for this story: Michael Hytha at email@example.com.