The implosion of New York-based Bear Stearns helped trigger the credit crunch and the eventual collapse and sale of the investment bank to JPMorgan Chase & Co. The government has been investigating possible fraud by banks and mortgage firms whose investments in subprime loans and securities plunged in value, causing losses that now total almost $450 billion.
At a court hearing Friday in Brooklyn, New York, for the former managers of Bear Stearns, Ralph Cioffi, 52, and Matthew Tannin, 46, Assistant U.S. Attorney Patrick Sinclair said prosecutors were “aware of instances where the defendant here has attempted to influence the statements of potential witnesses in the course of the Bear Stearns internal investigation.” Sinclair wouldn't identify which of the two former managers he was referring to, when asked after the hearing.
Sinclair argued for postponing the SEC case, saying it could hamper prosecutors and investigators in the criminal proceeding. He repeated the government's intention to file additional criminal charges by December.
“We know how much of a diversion of time that can be,” Sinclair said, referring to disputes over evidence in civil cases. He said this case is especially complicated because it involves “discovery from some of the largest financial institutions undergoing the most major crisis that they have ever faced before.”
Lawyers for both men yesterday urged U.S. District Court Judge Block to let the civil case go forward. They noted that no trial date has been set in the criminal case. “The SEC has chosen to bring its case, which should mean that it's prepared to go forward,” Susan Brune, one of Tannin’s lawyers, told Block. “The government has been investigating this case for a year. They have had a massive ability to get unilateral access to all of the witnesses.”
Marc Weinstein, a lawyer for Cioffi, said the government hasn't turned over any evidence related to Barclays PLC, the London-based bank referenced anonymously in SEC charging documents as a victim of the defendants' scheme. “There are allegations in here that our clients hoodwinked a major financial global institution, yet they don't have a single page to turn over directly from their file,” he said.
Barclays, the U.K.'s third-biggest bank, claimed in a lawsuit it filed last year in federal court in New York that it was misled by Cioffi and Tannin about the health of Bear Stearns's so-called enhanced fund managed.
Cioffi, now with Tenafly, New Jersey-based RCAM Capital LP, left Bear Stearns amid inquiries by prosecutors and the SEC into whether he withdrew $2 million from the funds four months before their collapse in July while at the same time persuading Barclays to double its stake.
The former hedge-fund manager was charged with one count of insider trading based on the $2 million redemption, prosecutors said. Both he and Tannin, who have pleaded not guilty, face as long as 20 years in prison if convicted of conspiracy. Cioffi faces an additional 20-year term if found guilty of insider trading. Cioffi managed the two funds that collapsed, and Tannin served as his chief operating officer.
The funds, which put most of their assets in subprime mortgage-related securities, failed in June 2007 when prices for collateralized-debt obligations linked to home loans fell amid rising late payments by borrowers with poor credit or heavy debt.
In March, three months after Cioffi left Bear Stearns, the 85-year-old firm was purchased by New York-based JPMorgan for about $1.4 billion in stock. Bear Stearns, worth almost $25 billion in January 2007, was pushed to the brink of insolvency when speculation about a cash-shortage prompted customers and lenders to flee.
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