Bear Stearns Hedge Fund Managers Arrested for Fraud

Two former Bear Stearns hedge fund managers were arrested Thursday and indicted on conspiracy and fraud counts.

Ralph Cioffi and Matthew Tannin were accused of encouraging investors to stay in their hedge fund, heavily invested in subprime mortgages, though they knew the credit market was in serious trouble, the Associated Press reports. “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.”

According to the AP, the Bear Stearns case against Cioffi and Tannin appears to be based heavily on a series of e-mails, in one of which Tannin said, “I think we should close the funds now,” and “the entire subprime market is toast.” Prosecutors say Cioffi pulled $2 million of his own cash from the fund, while the pair still told investors to stay in and that the outlook was good, and Tannin encouraged an investor to add money to the fund saying he would do the same, but never did.

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Both men pled not guilty at an afternoon arraignment and were released on bond, the news report said. They face up to 20 years in prison if convicted.

The U.S. Justice Department has announced the indictments of more than 400 people in the real-estate industry since March in a crackdown on mortgage fraud, 60 of whom were arrested on Wednesday. The alleged fraud charges include misstatement of income or assets, forged documents, inflated appraisals, and misrepresentation of a buyer’s intent to occupy a property as a primary residence.

Two Law Firms Probe Lehman Brothers 401(k) Plan Fiduciaries

The law firms of Milberg LLC and Liner Yankelevitz Sunshine&Regenstreif LLP separately announced they are investigating possible Employee Retirement Income Security Act (ERISA) violations by fiduciaries of the Lehman Brothers Holdings Inc. Savings Plan.

According to the Milberg announcement, it is investigating whether the company and certain officers and directors violated ERISA by continuing to offer Lehman Brothers stock as a plan investment when it was imprudent to do so, and by maintaining the plan’s investment in Lehman Brothers stock when it was imprudent to do so. The law firm’s investigation stems from class action complaints filed in the Northern District of Illinois.

Specifically, the complaints allege that the company:

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  • failed to disclose the true nature and extent of its exposure to losses in connection with subprime mortgage-backed derivatives;
  • failed to disclose the true nature and extent of its exposure to losses in connection with collateralized debt obligations and the timely write-down of those losses;
  • did not prepare its financial statements in accordance with Generally Accepted Accounting Principles; and
  • had inadequate internal and reporting controls.

LYS&R said it is analyzing whether company and the plan’s fiduciaries breached their fiduciary duties of loyalty and prudence to the plan’s participants by among other things, offering Lehman stock as a plan investment option, requiring participants to invest in the stock, and/or investing and holding company contributions in the stock at a time when the stock was not a suitable and appropriate investment option. The firm is also looking into whether the plan’s fiduciaries withheld or concealed material information from the plan’s participants with respect to the company’s business, financial results, and operations.

More information is available at http://www.milberg.com and http://www.californiaclassaction.com.

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