Cioffi and Tannin’s Indictment: Good News for Investors

Ralph Cioffi and Mathew Tannin, the former managers of the Bear Stearns’ hedge funds that collapsed last year, were indicted today. The SEC also filed civil charges today as well. I appeared on CNBC this afternoon to discuss whether the evidence will be enough to show “intent” and whether criminal charges were warranted. The answer is a resounding yes to both questions, especially given Tannin’s “smoking gun” email from his personal account to Cioffi’s wife’s email account where he frets over the funds future performance just days before making upbeat comments to investors. Cioffi’s withdrawal of $2 million from the funds before the collapse appears to provide evidence of his “intent”.

The criminal and SEC developments could bode well for investors seeking recovery of losses through the arbitration process. Tannin and Cioffi will be called to testify in arbitration hearings before their criminal trials take place and likely will exercise their Fifth Amendment rights against self incrimination. Attorneys can ask the arbitration panel to take what’s called an “adverse inference”, which means panelists can assume that if the defendants answered the questions, rather than pleading the Fifth, the answers would have adversely affected their interest.

It should be noted that JP Morgan has put aside billions of dollars for litigation costs when it acquired Bear Stearns.

Bear Stearns & Ralph Cioffi: Breaking Up is Hard to Do

We’ve obtained the termination “Form U-5″ filed by Bear Stearns regarding the now departed portfolio manager, Ralph Cioffi, who guided the two hedge funds specializing in investing in mortgage backed securities into the abyss. My prior blog post anticipated this filing.

The document discloses Cioffi left the firm under a “mutual agreement” with Bear Stearns effective November 28, 2007. The U-5 further states that in June 2007 the firm initiated an internal investigation into Cioffi’s “role and conduct” in the failed funds and that “in addition, Federal and state regulators and law enforcement are also investigating” the same hedge funds and “similar issues”.

Bear Stearns clearly wanted an amicable departure. Often when firms are under investigation they look to scapegoat others. In this instance, Bear Stearns has a strong interest in keeping Cioffi “on-the-reservation” given the firm’s exposure to allegations of fraud in criminal and civil proceedings. The firm stands to benefit so long as their interest and Cioffi’s are aligned. Therefore Bear Stearns doesn’t have any incentive to include “negative” disclosures which could shed light into how the hedge funds collapsed.

This is stark contrast to allegations that Wall Street firms use Form U-5 to defame departing employees in order to scapegoat them for firm-wide wrongdoing or prevent them from competing on a fair level. I actually have clients that allege Bear Stearns did just that when the firm struck a $250 million settlement with the SEC over mutual fund market timing. The sordid tale was chronicled by Forbes in a story entitled “Fall Guys”.

The message is that on Wall Street, you get the “kid-glove” treatment if you’re either a Wall Street CEO, or as with Cioffi, the firm needs a friend for upcoming litigation.