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Bear Stearns Execs' Trial Slated for September

Dec 8, 2008 | Parker Waichman Alonso LLP

Two former  Bear Stearns hedge fund executives are slated to go to trial in September over charges that they lied to investors about two of the funds they managed, Reuters is reporting.  The former executives managed the Bear Stearns High Grade Structured Credit Strategies Master Fund and the Enhanced Master Fund, which collapsed last year. Both funds were invested in mortgaged backed securities, and were among the first casualties of the mortgage meltdown.

Prosecutors allege that Ralph R. Cioffi and Matthew Tannin  knew that the Bear Stearns hedge funds  were losing money but  kept that information from large investors.  According to a report in The New York Times this past June, as early as March 2007, Cioffi and Tannin began receiving worried calls from investors and their lending banks as the subprime mortgage market began to fall apart.  The Times reported that Cioffi, according to transcripts reviewed by prosecutors, told investors on several occasions that he was optimistic about a recovery, culminating with a conference call on April 25 last year.

According to another report in The Wall Street Journal, prosecutors are focusing on an e-mail allegedly sent by the two suggesting that their funds were headed for trouble, four days before they told investors they were comfortable with their holdings.  Tannin allegedly e-mailed Cioffi saying he was afraid that the market for bond securities they had invested in was “toast,'’ and suggested shutting the funds, the Journal said.

Both men were indicted last summer on charges of conspiracy, securities fraud and wire fraud.  Cioffi faces an additional charge of insider trading. Prosecutors allege he transferred a portion of his own holdings from one of the funds without telling investors, Reuters said. They are scheduled to go to trial on September 28, 2009 in the  U.S. District Court in the Eastern District of New York.  

Bear Stearns, once the fifth-largest U.S. investment bank, faced a run on the bank  last March and was forced to sell itself to JPMorgan Chase & Co.  After the hedge funds collapsed last July, Bear’s investors became increasingly reluctant to do business with the company. The buyout of Bear Stearns by JPMorgan Chase - termed a “shotgun marriage” by some - was consummated after the Federal Reserve agreed to provide up to $30 billion in non-recourse financing to JPMorgan, with Bear Stearns’ illiquid mortgage and other securities as collateral.