Ralph Cioffi and Matthew Tannin are close to becoming the first two criminal indictment casualties of the subprime crisis, The Wall Street Journal reports this morning.

The U.S. Attorney General's Brooklyn Office is on the verge of charging the two with securities fraud, lawyers close to the investigation say, having allegedly found evidence that Cioffi and Tannin expressed concern over weakness in the secondary mortgage market to colleagues at Bear Stearns, all the while touting its resilience to investors.

Red flags have also been set off for investigators due to the fact Cioffi redeemed $2 million of his own money invested in the Bear Stearns High Grade Structured Credit Strategies Fund in March 2007, shortly after a precipitous decline in the subprime portion of the ABX Index. Bear Stearns didn't inform investors of the crash until June.

However, prosecutors are considering whether the managers were grappling with pricing the illiquid securities, and honestly believed the market was merely going through a correction and that the billions that the managers raised by selling bonds in order to prop up the two funds, would succeed in rescuing them. Ultimately, the two funds filed for bankruptcy on July 31, setting off a chain of events that led to the collapse of the firm, its absorption into JPMorgan last month, and the ongoing credit crisis threatening a U.S. recession.

Meanwhile, three other firms are facing possible charges by the U.S. Attorney General's office and other federal and state prosecutors. They are concerned that UBS didn't properly value its holdings, American Home Mortgage Investment Corp. conducted accounting fraud and Countrywide Financial is guilty of either securities or loan fraud.

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.

 

 

 

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