Nearly four years later Wall Street still remembers when Bear Stearns spiraled into insolvency in March of 2008. The collapse of the investment banking giant was only the beginning of what was later recognized as one of the greatest meltdowns in the history of Wall Street, subsequently followed by global financial crisis and recession.
Today the market is showing signs of improvement and most investors have moved on from the turbulent era of mortgage-based securities. But one agency is still pursuing the worst offenders of 2008, and it’s taking its battles to court.
The U.S. Securities and Exchange Commission continues to file both criminal and civil charges against some of the largest investment banks – including those who long ceased to exist – for reckless and sometimes fraudulent behavior that contributed to the collapse of the subprime-mortgage market.
But the agency’s adopted practices of quickly settling cases for immaterial sums without the defendant confirming or denying wrongdoing has raised a few eyebrows leaving people wondering – is the agency being too lenient?
The Securities and Exchange Commission’s latest settlement serves as a perfect example. Two former Bear Stearns hedge fund managers Matthew Tannin and Ralph Cioffi have agreed to settle a civil case brought by the SEC for $1.05 million. As part of the settlement, neither of the two executives had to admit wrongdoing.
The SEC attorney John Worland announced at the Federal District Court hearing that Cioffi agreed to pay $800,000 and accept a three-year ban from the securities industry while Tannin agreed to a $250,000 payment and a two-year ban, according to Bloomberg Law.
This wasn’t the first time the two hedge-fund managers have seen the courtroom. In 2009 Tannin and Cioffi were found not guilty of criminal charges brought by the U.S. Department of Justice. Federal prosecutors had accused the two men of fraudulent acts and misrepresentation with regard to the health and composition of their portfolios.
According to the complaint document, Cioffi and Tannin “deceived their own investors by fraudulently concealing from them the full extent of the funds’ deepening troubles.” It continued to allege that the two portfolio managers persuaded existing investors not to withdraw their money from the fund by “consistently misrepresenting the level of redemptions from the funds, the current state, and/or the composition of the funds’ portfolios.”
Ralph R. Cioffi, a 52-year-old resident of Tenafly, NJ, was asked in 2003 by Bear Stearns Asset Management to head up their two newly started hedge funds (the Bear Stearns High-Grade Structured Credit Strategies Fund and the Enhanced Leveraged Fund). Matthew M. Tannin, a 46-year-old resident of New York, NY, was brought into the fund in 2003 to assist Cioffi. Neither of the two men possessed any prior experience as a trader or hedge fund manager, according to the complaint.
The complaint went on to claim that Cioffi redeemed $2 million of his personal investment in the Enhanced Leverage Fund while falsely expressing his confidence in the funds and encouraging investors to add money to their portfolios. Similarly, Tannin repeatedly told investors that he was adding his own investment to the funds, when in reality he was trying to conceal the funds’ poor performance.
Without investor knowledge, the funds had taken highly leveraged positions in collateralized debt obligations based on subprime mortgage-backed securities. The true composition of the portfolios was concealed from investors during quarterly conference calls to discuss funds’ performance.
The funds collapsed in June 2007 as a result of high exposure to risky subprime mortgage loans, causing investor losses of approximately $1.8 billion. The two managers were aware of the deteriorating subprime market as evidenced by their repeated email exchange about the funds’ poor performance.
According to the complaint, Cioffi sent the following email to the funds’ economist on March 15, 2007 with the subject line “fear”:
“I’m fearful of these markets… As we discussed it may not be a meltdown for the general economy but in our world it will be. Wall Street will be hammered with law suits. Dealers will lose millions and the CDO business will not be the same for years.”
It was clear that through heavily investing in risky securities the two fund managers contributed to the collapse of the funds. Furthermore, they mislead investors and lied about the funds’ actual performance. Still, despite acute evidence of reckless behavior and subsequent investor loss of billions of dollars, the criminal charges were dropped and the SEC agreed to a mere $1 million settlement.
The Cioffi/Tannin case highlights the recent controversy surrounding the agency, which has been largely criticized for quickly settling the cases for immaterial sums of money without making the defendant either confirm or deny the charges.
In November of 2011 Federal Judge Jed S. Rakoff struck down a proposed $285 million settlement between SEC and Citigroup, calling the penalty “pocket change” for the investment bank giant, according to NYTimes’ Dealbook. Similar to Rakoff, opponents of the agency’s adopted practices frequently question why the SEC decides on such a modest settlement and lesser charges despite allegations of fraud.
Cioffi’s lawyer, Edward Little of Hughes Hubbard & Reed LLP, and Tannin’s lawyer, Nina Beattie of Brune & Richard LLP, declined to comment.