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Rachel Dollar, the editor of Mortgage Fraud Blog, is an attorney and Certified Mortgage Banker who handles litigation for lending institutions and secondary market investors. She is an author and a nationally recognized speaker on the topic of mortgage fraud. Ms. Dollar is a shareholder with the law firm of Smith Dollar, PC, is licensed to practice law in California and maintains offices in Santa Rosa, California. Email Ms. Dollar
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Ralph Cioffi and Matthew Tannin, both hedge fund managers at Bear Stearns, have been found not guilty after jury deliberations that lasted less than two days. The two men were acquitted of securities, wire and mail fraud according to media reports.
In June 2008, an indictment was unsealed in a Brooklyn, New York, federal court charging Ralph Cioffi, 52, the founder and senior portfolio manager of two Bear Stearns hedge funds, and Matthew Tannin, 46, a portfolio manager of the funds, with conspiracy, securities fraud, and wire fraud. Cioffi was also charged with insider trading, as previously reported by Mortgage Fraud Blog.
According to the indictment, Cioffi created the Bear Stearns High Grade Structured Credit Strategies Fund in 2003 and the Bear Stearns High Grade Structured Credit Strategies Enhanced Fund in 2006 (collectively referred to hereafter as the Funds). The indictment alleges that the defendants marketed the Funds as a low risk strategy that invested primarily in high grade debt securities, such as AAA and AA rated tranches, or pieces, of collateralized debt obligations (CDOs). CDOs are securities backed by a pool of debt securities, such as mortgages. Both funds utilized leverage, by borrowing capital from Wall Street lenders with the hope of earning a higher rate of return on their investments than the costs of the loans. By the late summer of 2006, the Funds held approximately $1.4 billion of investor funds under management.
The indictment alleges that by March 2007, the defendants believed that the Funds were in grave condition and at risk of collapse. However, rather than alerting the Funds’ investors and creditors to the bleak prospects of the Funds and facilitating an orderly wind-down, the defendants made misrepresentations to stave off withdrawal of investor funds and increased margin calls from creditors in the ultimately futile hope that the Funds’ prospects would improve and that the defendants’ incomes and reputations would remain intact. The subsequent collapse of the Funds during the summer of 2007 resulted in losses to investors totaling more than $1 billion.
The Funds’ Declining Financial Prospects
Throughout the spring of 2007, the defendants and other Fund employees privately acknowledged the Funds’ declining financial prospects. According to the indictment, Cioffi told another Fund employee that he feared the current state of the CDO markets and saw a long term meltdown on the horizon.
Similarly, in an April communication to Cioffi, Tannin stated,
“[T]he subprime market looks pretty damn ugly . . .. If we believe [our internal modeling] is ANYWHERE CLOSE to accurate I think we should close the funds now. The reason for this is that if [our internal modeling] is correct then the entire subprime market is toast . . .. If AAA bonds are systematically downgraded then there is simply no way for us to make money - ever.” (Emphasis in original)
Notwithstanding their views to the contrary, the defendants led investors and creditors to believe that, despite the challenges presented in the market, the Funds would continue to generate an increasing net asset value.
The Defendants’ Own Investments in the Funds
As alleged in the indictment, in the hedge fund industry, the fact that fund managers had their personal money in the funds they managed was critically important to investors. Personal investment, or “skin in the game,” established a manager’s faith in his fund and aligned the interests of managers with investors. However, the indictment charges that the defendants misled investors about the true nature of their investments in the Funds. Specifically:
Throughout March 2007, Tannin repeatedly told investors and Bear Stearns brokers responsible for selling the Funds that he believed that the market presented a buying opportunity and that he was adding to his investment in the Funds. In one instance, Tannin told an investor, “[w]e are seeing opportunities now . . . I am adding capital to the Fund. If you guys are in a position to do the same I think . . . this is a good opportunity.” In fact, Tannin never invested more of his own money in the Funds.
At the same time, while he was touting the prospects of the Funds, Cioffi transferred $2 million of his approximately $6 million investment in the Enhanced Fund to another Bear Stearns hedge fund for which he had supervisory responsibilities. This latter fund had recently experienced returns far superior to either the High Grade or Enhanced Funds. Cioffi never told investors he made this transfer and continued falsely to represent to investors that he held approximately $6 million in the Enhanced Fund.
The indictment charges Cioffi with one count of insider trading based on this $2 million redemption.
Misrepresentations Regarding Investor Redemptions
The amount of investor redemptions, or requests to withdraw funds, is significant to other investors in a hedge fund. A relatively large amount of pending redemptions may indicate a loss of investor confidence in the fund. A fund facing large redemption requests runs the risk of reducing liquidity and of being forced to sell assets at unfavorable prices to raise cash, thus diminishing the value of the remaining investors’ stake in the fund.
During an April 2007 conference call with investors – following his acknowledgment of the importance of investors knowing the status of redemptions – Cioffi falsely represented that the Funds “only have a couple million of redemptions for the June 30 date,” when he knew of approximately $47 million in total redemption requests for that date. Cioffi also omitted any reference to $67 million in redemption requests scheduled for April 30, 2007 and May 31, 2007. According to the indictment, Tannin also made misrepresentations concerning redemptions to a creditor of the Funds.
The Missing Notes
The indictment alleges that Tannin’s tablet computer, on which he took notes during 2007, and Cioffi’s notebook, in which he had made handwritten notes during the spring of 2007, both went missing after the United States Securities & Exchange Commission requested the production of documents and materials as part of its investigation of the collapse of the funds in the summer of 2007.
“Hedge fund investors, like all investors in our national markets, are entitled to rely on those to whom they entrust their investment dollars,” stated Benton J. Campbell, United States Attorney for the Eastern District of New York. “Honesty and fair dealing are at the foundation of this relationship of trust and confidence. These defendants chose to breach that trust, and they will now be held to account.” Mr. Campbell expressed his grateful appreciation to the Federal Bureau of Investigation and the United States Securities & Exchange for their assistance. Mr. Campbell added that the investigation is continuing.
Mark J. Mershon, Assistant Director-in-Charge of the Federal Bureau of Investigation, New York Field Division stated, “Investing in hedge funds entails certain market risks, but investors don’t assume the risk that fund managers will misrepresent facts. A fund can perform poorly and lose investor capital as a result of bad management, but losing investors’ money isn’t the crime. The crime is in misrepresenting the vitality of the fund, as these defendants surely did.”
Finally, a jury with some sense. Every story just has the government steamroling over people and the jury just accepts what the prosecutors say.
It’s about time that a jury took the time to understand that this “gotya” attitude isn’t enough to convict people just because the economy tanked. Kudos. The comments at the end of the story seem silly in view of the acquittal.
Failed Mortgage Firm Trustee Allowed $50,000 in Fees Union Leader
U.S. Bankruptcy Court Judge J. Michael Deasy will approve $50,000 in legal fees for the trustee of failed mortgage brokerage businesses Financial Resources Mortgage Inc. and CL&M Inc.
Bend Oregon Event to Help Homeowners Prevent Foreclosures Oregon.Gov
As part of an ongoing effort to help homeowners avoid foreclosure, state agencies are organizing a foreclosure-prevention event in Bend on Saturday, March 27, 2010.
Shelbyville Man Gets 2-Year Sentence For Loan Fraud Chattanoogan.Com
Prosecutor Gary Humble said the lost was approximately $2.3 million in the mortgage fraud involving hundreds of homes in the Shelbyville area.
Lend America, VP Ashley Banned from FHA Housing Wire
Michael Ashley, the embattled former vice president of Federal Housing Administration (FHA)-backed mortgage originator Lend America, and the company he worked for, were permanently banned from doing business in the industry last week.
Countrywide Tries to Pin Blame on Insurer Court House News
Countrywide Home Loans demands $111 million from Triad Guaranty Insurance, claiming Triad is trying to blame mortgage lenders for the insurer's role in the housing bubble and collapse.
Investors Say They Were Swindled in Property Scheme Fox 13 Now
Utah Division of Consumer Protection is joining forces with a few investors who claim they have been cheated by an agency called "Utah Mini Ranches.
Greenfield Man Accused of Housing Scam The Republic
A former real estate agent conned at least eight people by renting them properties actually owned by a federal agency and then running off with their deposits, prosecutors said.
Appraisal Institute Opposes Obama Administration's Plan for Homeowner 'Short Sales' PR News Wire
Citing concerns about increased mortgage fraud, four organizations representing more than 35,000 real estate appraisers today voiced their opposition to changes to an Obama administration program that will encourage "short sales" of homes.
Ownership Rights to Get Another Look TBO.Com
State lawmakers may beef up protections of property owners' rights by rewriting a law this spring that is at the center of a case of alleged fraud in Pasco County.
Thursday, February 18, 2010 F. Jeffrey Miller Trial Continued Testimony
As reported by Anne Mitchell, who viewed the trial:
Angela Parenza worked for Jeff Miller as the office manager for 7 or 8 years beginning in 1998. Parenza was indicted along with Miller and pled guilty to conspiracy to commit bank fraud and money laundering. Parenza testified that Miller or his contractors allegedly preferred to build all the...
Wednesday, February 10, 2010 F. Jeffrey Miller Trial Coverage Continued - Witness Testimony
Steve Middleton Testimony - Coverage Provided by Anne Mitchell
The Government continued in its cross examination of Steve Middleton. He was shown several HUD-1 statements involving sales of homes located in Overland Park, KS, and Olathe, KS. The HUD statements each allegedly showed line items of payments to (James) Moser & Associates, LLC's...
Monday, February 01, 2010 F. Jeffrey Miller Trial Coverage - Continued Witness Examination
According to Anne Mitchell, who is present in court for the trial:
Next Witness: Kelly Sanford
Kelly Sanford of the Federal Reserve was a short witness for the Government. Sanford manages electronic payments between banks and member financial institutions. He was shown copies of wire transfers and asked whether they coincided with the counts in...
Wednesday, January 27, 2010 F. Jeffrey Miller Trial - Prosecution Witnesses Continued
According to Anne Mitchell, who is viewing the trial:
January 13, 2010
Witness: Rick Hayes
Rick Hayes testified that on the day that he closed on his Miller Enterprise home, he received a phone call from the Kansas Banking Commission informing him that his loan was fraudulent. After the Hayes responded to a classified ad, they met with John...
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The information and notices contained on Mortgage Fraud Blog are intended to summarize recent developments in mortgage fraud cases and mortgage banking matters nationwide. The posts on this site are presented as general research and information and are expressly not intended, and should not be regarded, as legal advice. Much of the information on this site concerns allegations made in civil lawsuits and in criminal indictments. All persons are presumed innocent until convicted of a crime. Readers who have particular questions about mortgage banking, mortgage fraud matters or who believe they require legal counsel should seek the advice of an attorney. The creators, editors and sponsors of Mortgage Fraud Blog do not intend to create a confidential relationship or an attorney-client relationship by communication via or arising from this site.
Rachel Dollar, the editor of Mortgage Fraud Blog, is an attorney and Certified Mortgage Banker who handles litigation for lending institutions and secondary market investors. She is an author and a nationally recognized speaker on the topic of mortgage fraud. Ms. Dollar is a shareholder with the law firm of 
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