Bear Stearns' Trail of 'Lies'

Louis Lanzano / AP Photo (2) An unearthed filing reveals the prosecutors' playbook against the two $1.5 billion hedge fund managers whose indictment helped expose the mortgage crisis.

The government’s case against two Bear Stearns hedge-fund managers, Ralph Cioffi and Matthew Tannin, got a lot more clear this month, courtesy of a prosecutor’s document quietly filed in federal court in Brooklyn.

In a May 8, 2009, letter  to Judge Frederick Block, who is presiding over the case against Cioffi and Tannin, Benton Campbell, the U.S. Attorney for New York’s Eastern District, highlights some 18 pages of evidence—under the heading “Summary of Lie”—that describes the additional “fraudulent statements or activities” the two men allegedly engaged in during the months leading up to the collapse of two hedge funds in June and July 2007. Campbell’s letter is essentially the prosecution’s binding roadmap for the upcoming trial.

 In a March 15, 2007, email, Tannin allegedly wrote “I’m very serious—if you have clients who believed in what we could do in ’03 they should invest now. There are not many real reasons to think the mortgage market is going to implode.”

The failure of the two hedge funds, which together had around $1.5 billion of investors' money in them, is considered to be the first tangible evidence of the fissures in the market for mortgage-backed securities, and helped to expose the dangers lurking on balance sheets all across Wall Street. Since the funds’ collapse, Bear Stearns was sold to JPMorganChase, Lehman Brothers filed for Chapter 11 bankruptcy and Merrill Lynch sold itself to Bank of America just days shy of filing for bankruptcy itself. To put it mildly, the country and financial markets are still grappling with the consequences of these huge tectonic shifts in the world of finance.

Here’s a peek into the government’s playbook. All of the following points are allegations, of course, whose veracity will be determined at the trial:

• Between March 4 and March 23, Cioffi allegedly “lied” to BSAM management and investors “about his personal view of the performance and results of the [f]unds and, based on these lies, he encouraged investors to increase their positions in the [f]unds.” To Rich Marin, the head of BSAM, Cioffi wrote on March 4: “Rich I feel very good about our results given the meltdown this week…” Two days later, to both Marin and Warren Spector, then Marin’s boss and the co-president of Bear Stearns, Cioffi wrote: “We are in very good shape and given the turmoil I feel very very good about our performance.”

• On March 22 Cioffi allegedly told George Buxton, a senior managing director at BSAM, that “really what we should be talking to [an unnamed investor] about is increasing their investment [in the two hedge funds] and not redeeming” and then added the next day, “that being said they should probably invest more in [the two hedge funds] and start a position in [a third hedge fund Cioffi was soon to be managing]. I think that April will be a good time…”

•On March 2, to one investor—M. Moghadam—Tannin allegedly wrote, “All the news is good here, please give me a call so I can give you a full update. We are in GREAT shape—and I’d love for our investors to be as excited as we are.” On March 6, to “K. Chavanne,” another investor, Tannin wrote: “We are in great position. I think you guys should add some money for April 1st. We are seeing a lot of very good opportunities.”

• To Shelly Bergman, a former broker at Bear Stearns now at Morgan Stanley who had his own and his clients’ money invested in the doomed hedge funds, Tannin allegedly wrote on March 7, “…and I think Ralph and I are in agreement that we are looking at some great possibilities for the coming months. I don’t know where you are putting your money now but I would suggest we speak about adding more to the fund. That’s what I’m thinking.” On March 15, even though the fund had lost value in February and March was not looking good, Tannin wrote to Bergman: “Shelley—I’m very serious—if you have clients who believed in what we could do in ’03 they should invest now. There are not many real reasons to think the mortgage market is going to implode. In my mind the risk to the market is recession and I simply do not see that happening for the next six months.”