NEW YORK — Two former Bear Stearns hedge-fund managers were hauled into jail Thursday and charged with lying to investors about the collapse of the subprime-mortgage market, perhaps signaling the start of a wave of prosecutions arising from the housing meltdown.
Ralph Cioffi and Matthew Tannin were accused of encouraging investors to stay in their hedge funds, heavily exposed to subprime mortgages, even as they knew the credit market was in serious trouble.
They were indicted on conspiracy and fraud counts, the first criminal charges to be filed in the housing-market meltdown.
The eventual implosion of their two hedge funds cost investors $1.8 billion and started the domino effect that led to the demise of Bear Stearns itself, which barely avoided bankruptcy in a rescue buyout by JPMorgan Chase & Co.
“This is not about mismanagement of a hedge fund,” Mark Mershon, head of the New York FBI office, told reporters. “It is about premeditated lies to investors and lenders.”
The case against Cioffi and Tannin appears to be based heavily on a series of e-mails that reveal panic and disorder behind the scenes at the hedge fund as its investments began to slide.
“The subprime market looks pretty damn ugly,” Tannin wrote to Cioffi in April 2007. If Bear’s internal reports were accurate, Tannin suggested, “I think we should close the funds now.”
The situation became so dire that Cioffi pulled $2 million of his own cash from the fund, but the pair still told investors that the outlook was good, prosecutors said.
