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Bloomberg: Ex-Bear Stearns Fund Managers Indicted for Fraud


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Former Bear Stearns Cos. hedge fund managers Ralph Cioffi and Matthew Tannin, arrested this morning at their homes in New Jersey and Manhattan, were indicted for mail fraud and conspiracy in the first prosecution stemming from a federal investigation of last year's mortgage-market collapse.

The two men were charged with misleading investors about the health of two Bear Stearns hedge funds whose implosion ignited the subprime mortgage crisis. Cioffi was also charged with insider trading in the indictment, which cites a series of e-mails between the two men. They face as much as 20 years in prison if convicted of the most serious charges.

The U.S. government has been investigating possible fraud by banks and mortgage firms whose investments in subprime loans and securities plunged in value, causing losses that now total $396.6 billion. Cioffi and Tannin were also sued today by the Securities and Exchange Commission.

``The e-mails tell a damning story of these managers' awareness of the dire state of the funds, even as they talked them up among investors,'' said Dan Richman, a former federal prosecutor and now a professor at Columbia Law School in New York. ``There is a lot of political pressure on the Justice Department to move forward in this area.''

Arrested in Tenafly

Cioffi, 52, was arrested at 7 a.m. at his Tenafly, New Jersey, home. Tannin, 46, was arrested at the same time at his Manhattan apartment, said James Margolin, a spokesman for the Federal Bureau of Investigation's New York office. The two men were fingerprinted at FBI headquarters in Manhattan, then taken in handcuffs by six FBI agents to be transported across the East River to Brooklyn federal court for an appearance later today.

The collapse of the hedge funds began a credit squeeze that led to lawsuits against Countrywide Financial Corp., American Home Mortgage Investment Corp., Citigroup Inc. and JPMorgan Chase & Co.

After demands by clients and lenders for payment threatened Bear Stearns with bankruptcy, the 85-year-old firm agreed to sell itself to New York-based JPMorgan in March.

Cioffi's lawyer attacked the arrests, triggered by an investigation by Brooklyn U.S. Attorney Benton Campbell, as an effort by the government to make an example of innocent men.

``Because his funds were the first to lose might make him an easy target but doesn't mean he did anything wrong,'' said Edward Little, Cioffi's lawyer, in a statement.

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Well, even though no one else is interested, I am. :)


In a probe over three and a half months, dubbed Operation Malicious Mortgage, the Justice Department and the Federal Bureau of Investigation uncovered 144 mortgage-fraud cases. U.S. authorities arrested 60 people on Wednesday alone in 15 districts around the country.

The announcement comes at the same time that the Justice Department indicted two former Bear Stearns hedge-fund managers on criminal charges related to the subprime-mortgage market. See full story.

"Operation Malicious Mortgage and our other mortgage-related enforcement actions demonstrate the Justice Department's commitment and determination to combat these criminal schemes, hold their perpetrators accountable and help restore stability and confidence in our housing and credit markets," Deputy U.S. Attorney General Mark Filip said.

The multiagency operation primarily went after lending fraud, foreclosure-rescue scams and mortgage-related bankruptcy schemes.

FBI Director Robert Mueller said that this agency will continue to direct resources toward combating both mortgage fraud and corporate-securities fraud.

Reports of mortgage fraud have been on the rise over the past year, following the implosion of the subprime-mortgage market.

The two former Bear Stearns managers were charged in a nine-count indictment Thursday alleging wire fraud, conspiracy and securities fraud. Prosecutors said that they misled investors about the rapidly tanking value of the two funds, which had invested heavily in subprime mortgages. End of Story

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