SEC SETTLES WITH FORMER BEAR STEARNS FUND MANAGES
The Commission has reportedly settled one of its earliest and most high profile market crisis cases, the action against former Bear Stearns fund managers Ralph Cioffi and Matthew Tannin. SEC v. Cioffi, Case No. 08-2457 (E.D.N.Y. Filed June 19, 2008). The SECâ€™s action was brought in tandem with a parallel criminal case against the two men. U.S. v Cioffi, 08-CR-001415 (E.D.N.Y.). In November 2009, prosecutors were stunned when a jury returned not guilty verdicts as to both defendants after only hours of deliberation.
Despite the repudiation of the criminal case, and reports of post trial juror interviews that were highly favorable to the defense, the SEC persisted with its case to the brink of trial. The action centered on the collapse in July 2007 of two Bear Stearns hedge funds once valued at about $20 billion tied to the subprime real estate market, the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund and the High-Grade Structured Credit Strategies Master Fund, Ltd.
The SECâ€™s complaint alleges an intentional fraud in which the defendants misrepresented the true condition of the two funds to investors as the market crisis began to unfold. The purpose was to prevent a run on the funds. Despite internal discussions regarding the fact that certain assets were over valued and a possible change in investment strategy, investors were told by the two managers that they were â€œvery comfortableâ€ with the investment strategy of the funds. Investors were not told the truth regarding the size and scope of the redemptions being demanded. Indeed, in May 2007 as the funds were collapsing the defendants continued to misrepresent the true financial condition of the funds, according to the SEC. Investors also were not told that Mr. Cioffi began moving about one third of his $6 million investment out to another fund. Investors lost about $1.8 billion when the funds collapsed.
The Commissionâ€™s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). It seeks an injunction, disgorgement, prejudgment interest and civil penalties.
Under the terms of the proposed settlements, Mr. Coffi agreed to disgorge $700,000 and pay a $100,000 civil penalty. He will also be barred from the securities business for three years. Mr. Tannin will pay disgorgement of $200,000 and a $50,000 civil penalty. He will be barred from the securities business for two years.
The Court directed the parties to file papers regarding the arrangement next week. The SEC reportedly is pleased with the settlement. Judge Frederic Block, who is presiding over the case, stated that it is being settled for â€œrelatively speaking, chump change,â€ according to a report published by Businessweek. The Judge indicated that he expected to sign off on the settlement.