Legal News

Sizing Up the Bear Managers Criminal Case: Conviction or Acquittal?

By Dan Slater

It’s official. Former Bear hedge fund managers Ralph Cioffi and Matthew Tannin have been arrested. EDNY prosecutors say they will hold a news conference this afternoon to announce conspiracy and fraud charges. Authorities are expected to publicly escort them to Brooklyn federal court. At issue is whether they deliberately misled investors about the strength and performance of their two portfolios, the High-Grade Structured Credit Strategies Fund and a riskier sister fund.

While Cioffi and Tannin, who may also get slapped with a civil securities-fraud suit from the SEC, await their perp walk, the WSJ’s Kate Kelly walks us up to the indictments. Based on this story, and a Monday report, here’s what we know.

• On April 22, 2007 — four days before Cioffi, 52, and Tannin, 46, told investors there was little to worry about — Tannin, using his private e-mail account, emailed Cioffi that he feared the market for complex bond securities was “toast.” At the time, the condition of the credit markets was murky, writes Kelly. In early 2007, the funds had posted modest returns, then dipped with a decline in subprime-backed securities, but snapped back in March and April.

  In the e-mail, Tannin, a law school grad, suggested they discuss the possibility of shutting down the funds. In response, Cioffi suggested a meeting at his Tenafly, N.J., home to discuss Tannin’s concerns. During the three-hour meeting, Cioffi and a third colleague persuaded Tannin that he was overreacting to the statistics. Cioffi reportedly argued that the funds were expected to soon close on a new financing agreement with a large bank, and that therefore the funds were well-positioned to invest in only the highest-quality bonds. Cioffi acknowledged that no one could ever predict market events with certainty, but said Tannin had reason to feel confident.

• Early the following week, Bear’s Asset Management CEO, Richard Marin, having heard about Tannin’s doubts, asked to meet with Cioffi and Tannin to discuss issues prior to the April 25 investor call. Marin asked Tannin if he was comfortable with the plan for the funds, and Tannin said yes.
• Four days after the Sunday-morning email, Tannin told fund investors on a conference call that he was “quite comfortable” with their holdings. Cioffi used similar language. Final performance numbers for March weren’t yet available, Cioffi said. But, although the funds appeared to have declined in value, he said they had plenty of “liquidity,” as well as marketable securities and lines of credit, and that he believed the portfolios were on solid ground. Tannin concurred.

LB Readers: Based on what we know — and there might be much more to the case on the prosecution or defense sides — do you think Cioffi and Tannin, in a trial, would be convicted or acquitted?

Full post as published by Law Blog - WSJ.com on June 19, 2008 (boomark / email).