The Great Mortgage Fund Crackdown
Thursday, June 19, 2008SUZANNE PRATT: Two former Bear Stearns hedge fund managers were indicted and arrested today in the first criminal prosecution stemming from the collapse of the sub-prime mortgage market. Ralph Cioff and Matthew Tannin were charged with mail and securities fraud as well as conspiracy. They each face up to 20 years in prison if convicted. Cioffi was also charged with insider trading. The government alleges the pair misled investors about the health of hedge funds that bet heavily on sub- prime debt. As Darren Gersh reports, those charges come on the same day prosecutors revealed hundreds of indictments linked to the nation`s housing crisis.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: It was the first perp walk of the mortgage market meltdown. Two former Bear Stearns hedge fund managers, Ralph Cioffi and Matthew Tannin, charged with securities fraud that cost investors more than a billion dollars. U.S. Attorney Benton Campbell says the men committed a crime after investments they`d made in the sub-prime mortgage market turned bad.
BENTON CAMPBELL, U.S. ATTORNEY, EASTERN DISTRICT OF NY: Rather than disclosing the true state of the funds to investors and lenders, however, the defendants lied about the fund`s condition, including their prospects, liquidity and exposure to the sub-prime market.
GERSH: Campbell stressed the two men did not cause the collapse of Bear Stearns, but their actions did take a toll. The key piece of evidence in this case, an email in which Tannin calls the sub-prime market damn ugly. If reports of problems in the market were right, Tannin adds, quote, we should close the funds now. The entire sub-prime market is toast, end quote. A month before that email was sent, prosecutors say Chioffi called the fund an awesome opportunity. Prosecutors charge the two men also lied about mounting requests to pull money out of the fund. In Federal court this afternoon both men pleaded not guilty and were released after posting bonds of more than $5 million. Cioffi defense attorney Edward Little says the government`s case won`t hold up.
EDWARD LITTLE, DEFENSE ATTORNEY: The only good news today is there will be a trial in this case and hopefully at the end of the trial, we`ll get a jury verdict that says not only that Ralph Chioffi is innocent, but that his reputation is restored.
GERSH: The Bear Stearns case promises to be the first of many. Speaking in Washington, FBI Director Robert Mueller said 19 sub-prime- related investigations are underway up and down Wall Street.
ROBERT MUELLER, FBI DIRECTOR: Currently, we have been focusing our investigative resources on potential frauds committed by the investment banks, hedge funds, brokerage houses, rating agencies and due diligence firms.
GERSH: In a separate action, the Justice Department continues to look into some of the scams that Fed the housing bubble. Prosecutors made 60 mortgage fraud arrests yesterday. U.S. Attorney Alexander Acosta today announced 19 indictments were handed down this week in south Florida alone.
ALEXANDER ACOSTA, US ATTY SOUTHERN DISTRICT OF FL: Ultimately we`re going to prosecute. We`re going to be very aggressive. But the real answer is prevention and that is where a lot of the focus should be. That said, we have seen and we will continue to see the costs of declining property values have on our families, in our communities.
GERSH: The FBI now has 1,400 active mortgage scam inquiries underway. But investigators have received more than 50,000 reports of suspicious activity from lenders. That`s far more than state and Federal prosecutors have the time or resources to investigate. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
