Bears Behind Bars

Today two former Bear Stearns employees, Ralph Cioffi and Matthew Tannin, were arrested on charges of securities fraud and insider trading. You may remember the whole debacle as the tip of the mortgage iceberg last summer. A pair of hedge funds at Bear just absolutely blew up, and the magnitude of the losses seemed to finally wake everybody up to how much danger there really was in the subprime mortgage market.

One might even say that this hedge fund debacle was the first nail in the coffin for Bear Stearns itself. After all, it was primarily a complete loss in customer and creditor confidence that ended up forcing the firm to sell out for practically nothing.

Of course, running a hedge fund into the ground is hardly illegal -- as the hedge fund industry has grown by leaps and bounds there are undoubtedly a lot of funds that have either been unlucky or just mismanaged and ended up sending "I'm so sorry" letters to their investors. The rub here is that prosecutors are alleging that Cioffi and Tannin knew that the funds were in trouble but told investors other wise and -- worse yet -- may have misstated asset values.

Among the bits of evidence:

- Emails exchanged between Cioffi and Tannin in April of 2007 in which Tannin said that the subprime market "looks pretty damn ugly. ... If we believe [our internal modeling] is ANYWHERE CLOSE to accurate I think we should close the funds now."

- Cioffi pulled $2 million of his own money from the fund but still said that investors should stay in it.

Scapegoats or hucksters? If the above is true it'd be hard to argue that they were simply victims of a collapsing market.

-AvgJoe