Two former hedge fund managers at investment bank Bear Stearns defrauded investors by concealing problems that led to the $1.4 billion (710 million pound) collapse of funds linked to subprime lending, a federal indictment unsealed on Thursday charged.
The indictment by a New York federal grand jury also said the two, Ralph Cioffi and Matthew Tannin, touted the funds as an "awesome opportunity" to investors as they were privately discussing grave concerns over the prospects of two funds they managed.
The two were charged with eight counts of wire and securities fraud in the highest profile case brought to date in connection with the collapse of the subprime lending industry.
Cioffi also was charged with insider trading.
The indictment says the two also concealed the funds' problems from their superiors at Bear Stearns.
Their lawyers said they were innocent.
The indictment said, "Starting at least by March 2007, Cioffi, Tannin and others believed that the funds were in grave condition and at risk of collapse.
"Rather than disclosing the true state of the funds to investors and lenders, thus allowing an orderly wind-down of the funds, Cioffi and Tannin agreed to make representations in the ultimately futile hope that the funds' bleak prospects would change and that their incomes and reputations would remain intact."
In June of last year investors in the two funds were told they could not redeem their investments. "Eventually, investors were told that the funds had both lost 100 percent of their respective values, resulting in a total investor loss of approximately $1.4 billion," the indictment said.
It quoted Cioffi as telling Tannin on March 3, 2007 "the worry for me is that subprime losses will be far worse than anything people have modelled." Soon after he predicted a "meltdown" in the subprime sector and told a colleague he was "sick to my stomach" over the funds' March performance.
Nevertheless, the indictment said, Cioffi and Tannin promoted their funds as a buying opportunity. "We have an awesome opportunity," Cioffi told a Bear Stearns broker with clients invested in the funds.
Tannin gave a similar message to the same broker, and told investors he was going to add money to his own investments in the funds. But Tannin never did add money and Cioffi transferred $2 million of his $6 million investment in one of the funds to another Bear Stearns fund with a higher return and failed to tell investors who asked that he had done so, the indictment said.
