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Prosecutors Build Bear Stearns Case on E-Mails

Annie Tritt for The New York Times

At left, Ralph R. Cioffi, center, a onetime Bear Stearns fund manager. At right, Matthew M. Tannin, also a former hedge fund manager at Bear Stearns.

By LANDON THOMAS Jr.
Published: June 20, 2008

In the spring of 2007, as the mortgage market came unglued, two Bear Stearns executives shared their growing fears in a series of e-mail messages to each other about the perilous condition of the giant hedge funds they oversaw.

 
Indictment: (U.S. v. Cioffi, Tannin) (pdf)
Managing Globalization Blog (IHT)

New Villains in the Subprime Mess

“I’m fearful of these markets,” one wrote.

The other said later, “Believe it or not — I’ve been able to convince people to add more money.” He concluded that “I think we should close the funds now.”

But three days later, the pair, Ralph R. Cioffi and Matthew M. Tannin, presented an upbeat picture to worried investors without disclosing that the two funds were plummeting in value and that Mr. Cioffi had already pulled some assets from one of them.

A little more than a month later, the funds, filled with some of the most explosive and high-risk securities available, imploded, evaporating $1.6 billion of investor assets and setting off a financial chain reaction that has rattled global markets, caused more than $350 billion in write-downs, cost a number of executives their jobs and culminated in the demise of Bear Stearns itself.

On Thursday, Mr. Cioffi and Mr. Tannin surrendered to federal agents at 7 a.m. They were fingerprinted and taken in handcuffs to the federal courthouse in Brooklyn where they were charged with nine counts of securities, mail and wire fraud.

The two men, who were forced out of their jobs last year, are the first senior executives from Wall Street investment banks to face criminal charges stemming from the credit mess, and the investigation by federal prosecutors based in Brooklyn is likely to become a test case of the government’s ability to make successful prosecutions of arcane financial transactions.

“This is not about mismanagement of a hedge fund investment strategy,” said Mark J. Mershon, the head of the New York office of the Federal Bureau of Investigation, at a news conference Thursday. “It is about premeditated lies to investors and lenders.”

Yet, despite the drama, there is no guarantee that cases that rely on e-mail exchanges and unclear states of mind result in jail time. In one prominent case involving e-mail exchanges, for example, charges were ultimately dropped against Frank P. Quattrone, the high-level Credit Suisse banker accused of interfering with a government investigation.

Despite the publicity surrounding the Enron scandal, some high-profile cases, which like this one were based on e-mail exchanges and complicated financial arrangements, were successfully challenged.

“We have to be wary of a rush to judgment,” said Robert A. Mintz, a former federal prosecutor and a lawyer at McCarter & English. “The question is whether these managers crossed the line from permissible spin to willful misrepresentation.”

Mr. Cioffi posted bail of $4 million, secured by his house in Tenafly, N.J., property in Naples, Fla., and a $600,000 individual retirement account. Mr. Tannin’s bail was $1.5 million, to which he attached an apartment on West End Avenue in Manhattan.

Despite the highly complex nature of the subprime investments, the government’s base claim is simple: Mr. Cioffi and Mr. Tannin, in a desperate bid to keep fretful investors from heading for the exits, deceived investors by not disclosing how badly the two funds were doing.

In an indictment made public Thursday, prosecutors relied heavily on e-mail exchanges between Mr. Cioffi and Mr. Tannin in trying to paint a picture of fear and desperation inside Bear Stearns as the firm grappled with a crisis that would eventually lead to its end.

In a statement, Edward J. Little, a lawyer for Mr. Cioffi, said that the credit market had spread losses throughout Wall Street. “Ralph Cioffi’s funds lost money in exactly the same way,” Mr. Little said. “Because his funds were the first to lose might make him an easy target, but doesn’t mean he did anything wrong."

Susan Brune, a lawyer for Mr. Tannin, said her client had been made a scapegoat for the wider market crisis.

The two funds had names as abstruse as the complex subprime securities in their portfolios — High Grade Structured Credit Strategies Fund and its riskier sister offering, the High Grade Structured Credit Strategies Enhanced Leverage Fund.

Overseen by Mr. Cioffi, a well-regarded executive with more than 22 years of experience at Bear Stearns, the funds were in essence a symbol of the frenzy and greed that characterized the booming subprime mortgage market from 2003 through 2006. The funds were highly leveraged, in some cases borrowing as much as $20 for every dollar invested and were sold to Bear’s most exclusive clients.

Through 2006, the High Grade fund did well, gaining as much as 40 percent in one year. In August, to satisfy demand from clients, Bear started a second fund at what would prove to be the top of the market.

According to the indictment, Mr. Cioffi and Mr. Tannin became aware of the funds’ difficulties in March. Mr. Cioffi gathered his team and led a vodka toast in celebration of their overcoming a rocky February. But as the markets got worse, Mr. Tannin became increasingly worried about the funds’ exposure to securities backed by subprime mortgages.

Mr. Cioffi calmed him: “We are not 19 year olds in Iraq,” he said in an e-mail message that was part of the indictment. But his own worries were growing. After a bad March, he told a colleague, “I’m sick to my stomach over our performance in March.”

The indictment claims that the two men hid their concerns from investors, lenders and even Bear’s own brokers. “We have an awesome opportunity,” Mr. Cioffi said to a Bear Stearns broker. Mr. Tannin congratulated himself: “Believe it or not I’ve been able to convince people to add more money,” he said to a colleague.

In late March, the indictment claims that the funds’ decline prompted Mr. Cioffi to transfer $2 million out of the $6 million he had in the Enhanced Fund and put it in a less risky fund that was showing better performance.

Prosecutors claim that the move — which he never disclosed to outside investors who themselves were desperate to exit — was proof that he was putting his interests ahead of clients.

Bear Stearns and Mr. Cioffi’s lawyers say that there was no such motive and that Mr. Cioffi’s investment was done in support of the other fund in which he was not previously invested and that he managed.

In late April, investors were becoming concerned. One investor tried to pull $57 million. Mr. Cioffi, in a bid to keep the investor in the fund, said that he himself had $8 million invested. The indictment says that was a lie.

A few days later, Mr. Tannin, who was known within the group as a worrier, sent an e-mail message to Mr. Cioffi in which he suggested closing down the funds after a report showed that the securities they were holding were rapidly losing value. “If the report was true, the entire subprime market was toast,” he wrote to Mr. Cioffi. The subprime market looked “pretty dam ugly,” he wrote from his home, early Sunday morning.

It was a radical proposition from one of the funds’ managers, and Mr. Tannin took the precaution of not using Bear’s e-mail system, prosecutors said. He sent the note to the e-mail account of Mr. Cioffi’s wife.

A few days later, on an April 25 conference call, Mr. Cioffi and Mr. Tannin presented a sanguine face to investors, arguing that the funds were in good shape.

The two managers did all they could to right their sinking funds, even going so far as to pitch to their group’s pricing team that the securities should receive higher values, thus mitigating the funds’ decline, according to the indictment. Their request was rejected.

In June, as the market continued its descent, Mr. Cioffi told investors that they could not withdraw funds. Despite a last-ditch effort by Bear Stearns to bail the funds out by offering a $3.2 billion loan, clients in both funds lost 100 percent of their investments.

Just before the funds’ collapse, Mr. Cioffi, who just a year earlier was making an eight-figure salary, gave voice to his fears. “I’ve effectively washed a 30-year career down the drain,” he said.

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Submitted by

Ed Cage

1804 Cross Bend, Plano Texas

(972) 596-4363

ecagetx@gmail.com


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BobInAVanDownByTheRiver
Scapegoats,

Big Time Scapegoats, period.

Sucide in their future?


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TIMELINE:

Former Bear Stearns Managers Face Criminal Charges

By Yalman Onaran - Bloomberg

June 19 (Bloomberg) --
 Ralph Cioffi and Matthew Tannin, former Bear Stearns Cos. hedge fund managers, today became the first Wall Street executives to face criminal charges as a result of the subprime crisis.

Cioffi and Tannin were arrested at their homes by FBI agents and face securities fraud charges. The former executives ran two hedge funds whose collapse last year exposed the problems with subprime securities and triggered a credit-market rout that has so far led to almost $400 billion of losses in banks worldwide.

The following is a timeline of events leading to today's arrests:

October 2003:
Cioffi starts the High Grade Structured Credit Strategies Fund as part of Bear Stearns Asset Management Inc., a unit of the investment bank that managed clients' money through various fund offers. The High Grade Fund invested in collateralized debt obligations that were backed by subprime mortgage loans.
 
August 2006:
Cioffi establishes a second investment vehicle, the High Grade Structured Credit Strategies Enhanced Leverage Fund, which mimicked the first one's investing style but borrowed more money as a multiple of its equity to boost returns.
 
February 2007:
The enhanced fund, after returning 7 percent in the first six months, loses about 0.1 percent in February, the first month in which prices of mortgage-related assets dip. Cioffi withdraws $2 million of his own money, a third of the amount he'd invested in the enhanced fund, to invest in a new fund he was establishing, called Structured Risk Partners.
 
Feb. 27, 2007:
Tannin e-mails a Barclays Bank Plc representative with the fund's most recent performance. ``As you can see,'' he wrote, ``despite the sell off in the subprime mortgage market, our fund continues to do well, quite well, in fact.''
 
March 2007:
The original fund declines 3.7 percent during the month. Its cumulative return since inception is still 46.8 percent.
 
April 2007:
Prices of mortgage securities recover as concern about the subprime market subside temporarily. The Standard & Poor's 500 Index, after a 6 percent drop, resumes its rise.
 
April 22, 2007:
Tannin, Cioffi's deputy, sends his supervisor an e-mail that raises concern about the future of the funds in case the February and March declines weren't just temporary setbacks.
 
April 25, 2007:
Cioffi and Tannin hold a conference call with investors in the two funds, telling them there are no serious long-term problems with their investments.
 
June 2007:
Prices of mortgage-related assets drop again, with some losing as much as 5 percent in two weeks. Because the enhanced fund is leveraged about 20 times, or borrowed $200 for every $10 investors put in originally, the losses are big enough to wipe out all the equity.
 
June 14, 2007:
Bear Stearns executives acknowledge during a conference call with investors that the two hedge funds are losing value.
 
June 15, 2007:
Merrill Lynch & Co., one of the largest lenders to the two hedge funds, seizes assets when its demand for increased collateral can't be met.
 
June 22, 2007:
After coming under pressure by other Wall Street firms who had loaned money to the funds, Bear Stearns offers to lend $3.2 billion to the original hedge fund to replace the debt remaining on its books.
 
July 17, 2007:
Investors in the two funds are told there is no value left in the funds, wiping out $1.6 billion originally invested.
 
July 31, 2007:
Bear Stearns files for bankruptcy protection for the two funds in courts in Cayman Islands and the U.S.
 
Dec. 19, 2007:
Bear Stearns confirms that Cioffi left the firm a week earlier just as the U.S. Attorney in Brooklyn and the Securities and Exchange Commission said they were investigating possible wrongdoing by the funds' managers.
 
March 14, 2008:
Bear Stearns seeks and gets emergency funding from the Federal Reserve as a run on the bank depleted its cash reserves in three days.
 
March 16, 2008:
JPMorgan Chase & Co. agrees to buy Bear Stearns for 7 percent of its market value in a sale brokered by the Fed and the U.S. Treasury during the weekend following the emergency funding.
 
May 31, 2008:
Bear Stearns ceases to exist when the acquisition by JPMorgan is completed.
June 19, 2008: FBI agents arrest Cioffi and Tannin, charging them with fraud. Cioffi and Tannin are also sued by the SEC on claims they fraudulently misled investors before the funds collapsed.
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Submitted by
Ed Cage
Plano Texas
972-596-4363
ecagetx@gmail.com
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Not Batman

Nice pic's!

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Not Batman

Emails are the keys to a lot of theses cases.

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Klayman & Toskes Expects Investor Claims to Increase Following Indictments of Bear Stearns Cioffi, Tannin 

Former Bear Stearns fund managers arrested over mortgage crisis

 

 

NEW YORK, NY, Jun 20, 2008 
The Securities Law Firm of Klayman & Toskes, P.A. (http://www.nasd-law.com) said today that claims against Bear Stearns on behalf of investors in Bear Stearns' High-Grade Structured Credit Strategies and High-Grade Structured Credit Strategies Enhanced Leverage Funds ("the Bear Funds") are expected to increase following the criminal indictment, Cr. No. 08 415, of the former managers of the Bear Funds. (Bear Stearns is now a part of JP Morgan Chase & Co. (NYSE: JPM: 37.86, -0.79, -2.04%)).

Early yesterday morning, Ralph R. Cioffi and Matthew Tannin were taken into custody and charged by prosecutors from the Office of the United States Attorney for the Eastern District of New York. Charging Cioffi with four counts of securities fraud and Tannin with three counts of securities fraud, federal prosecutors essentially said that the two lied to investors about the collapse of the subprime mortgage market. In an April 2007 e-mail from Tannin to Cioffi, he said, "The subprime market looks pretty damn ugly." Based upon internal Bear Stearns reports observed by Tannin, he proposed, "I think we should close the funds now," and "the entire subprime market is toast." Tannin, however, failed to convey this material information to investors of the Bear Funds. Cioffi went as far as to pull $2 million of his own money out of the fund, while telling investors to remain optimistic regarding the future performance of the fund. In connection with this redemption, Cioffi was separately charged with insider trading.

In addition to the indictment handed down by the Office of the United States Attorney, the United States Securities and Exchange Commission also filed a complaint yesterday in Brooklyn federal court. The complaint alleges that during the first five months of 2007, Ralph Cioffi and Matt Tannin "deceived their own investors, as well as the fund's institutional counterparts, by fraudulently concealing from them the full extent of the fund's deepening troubles." The SEC also noted, "Cioffi's clandestine redemption caused the Enhanced Leverage Fund to pay out $2 million at a time when the markets were weak and the fund was facing another month of losses, as well as escalating margin calls and forced sales."

According to Steven D. Toskes, a partner at Klayman & Toskes, "While Cioffi and Tannin are the first Wall Street executives to be charged in connection with the subprime crisis, they most likely will not be the last. The criminal counts contained in the federal prosecutors' indictment simply confirm what we have been hearing from investors who believed that Bear Stearns made misrepresentations and engaged in fraudulent conduct in connection with the Bear Funds." Klayman & Toskes expects that filings against Bear Stearns on behalf of institutions, hedge funds and fund of funds will increase in the coming weeks given the amount of inquiries and in light of the recently filed charges.

The attorneys at the Law Firm of Klayman & Toskes are dedicated to aggressively pursuing claims on behalf of investors who have suffered losses in the Bear Funds, and as a result of the credit crisis and subprime fallout as a whole. Klayman & Toskes, an experienced, qualified and nationally recognized securities litigation law firm, practices exclusively in the field of securities arbitration and litigation. It continues its representation of investors throughout the world in securities arbitration and litigation matters against major Wall Street brokerage firms. If you wish to discuss this announcement or have information relevant to our claims, please contact Steven D. Toskes, Esquire or Jahan K. Manasseh, Esquire of Klayman & Toskes, P.A., at 888-997-9956, or visit us on the web at http://www.nasd-law.com
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