U.S. Securities & Exchange Commission
SEC Seal
Home | Previous Page
U.S. Securities and Exchange Commission

SEC Charges Two Former Bear Stearns Hedge Fund Managers With Fraud


Washington, D.C., June 19, 2008 — The Securities and Exchange Commission today charged two former Bear Stearns Asset Management (BSAM) portfolio managers for fraudulently misleading investors about the financial state of the firm's two largest hedge funds and their exposure to subprime mortgage-backed securities before the collapse of the funds in June 2007.

The SEC's complaint alleges that when the hedge funds took increasing hits to the value of their portfolios during the first five months of 2007 and faced escalating redemptions and margin calls, then-BSAM senior managing directors Ralph R. Cioffi and Matthew M. Tannin deceived their own investors and certain institutional counterparties about the funds' growing troubles until they collapsed and caused investor losses of approximately $1.8 billion.

The SEC's action was conducted through its Enforcement Division's subprime working group, which is aggressively investigating possible fraud, market manipulation, and breaches of fiduciary duty that may have contributed to the recent turmoil in the credit markets.

In a related criminal action today, the U.S. Attorney's Office for the Eastern District of New York announced the indictment of Cioffi and Tannin on conspiracy and fraud charges.

"Hedge fund managers owe serious obligations to investors in their funds, and the Commission will be unyielding in its commitment to vigorous investor protection by enforcing the securities laws against them whenever warranted," said SEC Chairman Christopher Cox. "Hedge funds are by no means unregulated when it comes to fraud. Those who commit fraud at the expense of investors will always be the target of a relentless SEC."

Linda Chatman Thomsen, Director of the SEC's Division of Enforcement, said, "Hedge fund managers remain subject to the same prohibitions against fraud as other market participants. When they choose to make public statements, they must not speak falsely or omit material information."

Antonia Chion, Associate Director of the SEC's Division of Enforcement, added, "Hedge fund managers cannot lie to their own investors as alleged here, simply because those investors happen to be more sophisticated than the general public. Particularly in times of poor performance or market difficulty, even sophisticated investors look to fund managers to speak truthfully to them."

According to the SEC's complaint, filed in the U.S. District Court for the Eastern District of New York, the Bear Stearns High-Grade Structured Credit Strategies Fund and Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund collapsed after taking highly leveraged positions in structured securities based largely on subprime mortgage-backed securities. Cioffi acted as senior portfolio manager and Tannin acted as portfolio manager and chief operating officer for the funds, and they misrepresented the funds' deteriorating condition and the level of investor redemption requests in order to bring in new money and keep existing investors and institutional counterparties from withdrawing money. For example, Cioffi misrepresented the funds' April 2007 monthly performance by releasing insufficiently qualified estimates — based only on a subset of the funds' portfolios — that projected essentially flat returns. Final returns released several weeks later revealed actual April losses of 5.09 percent for the High-Grade Structured Credit Strategies Fund and 18.97 percent for the High-Grade Structured Credit Strategies Enhanced Leverage Fund.

The SEC's complaint alleges that Cioffi and Tannin also misrepresented their funds' investment in subprime mortgage-backed securities. Monthly written performance summaries highlighted direct subprime exposure as typically about 6 to 8 percent of each fund's portfolio. However, after the funds had collapsed, the BSAM sales force was ultimately told that total subprime exposure — direct and indirect — was approximately 60 percent.

The SEC further alleges that Cioffi and Tannin continually exaggerated their own investments in the funds while using their personal stake as a selling point to investors. Tannin repeatedly told investors, directly and through the Bear Stearns sales force, that he was adding to his own stake in the funds in order to take advantage of the buying "opportunity" presented by the funds' losses. Tannin never actually added to his investment. He mocked as "silly" at least one investor who sought to redeem instead of following Tannin's supposed example. Meanwhile, Cioffi redeemed $2 million, which was more than one-third of his personal investment in the funds at the end of March 2007. Cioffi transferred it to another BSAM fund that he described as "short sub prime," which he knew was profitable at the time.

The Commission alleges in its complaint that Cioffi and Tannin violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In its complaint, the Commission seeks permanent injunctive relief, disgorgement of all illegal profits plus prejudgment interest, and the imposition of civil monetary penalties.

The Commission appreciates the cooperation of the U.S. Attorney's Office for the Eastern District of New York and the Federal Bureau of Investigation, which conducted a separate, parallel investigation.

The Commission's investigation is continuing.

# # #

For more information, contact:

Daniel Chaudoin
Assistant Director, SEC's Division of Enforcement
(202) 551-4952

John Worland, Jr.
Assistant Chief Litigation Counsel, SEC's Division of Enforcement
(202) 551-4438



Modified: 06/19/2008