Archive for October, 2009

This week signals the start of the criminal trial for Ralph Cioffi and Matthew Tannin, the two former Bear Stearns executives who cost investors millions of dollars after allegedly deceiving them about the fiscal health of two  Bear Stearns hedge funds that collapsed under the weight of mortgage-laden investments. For many, the long-awaited trial, which gets underway Oct. 13, will be viewed as a legal barometer of when and how Wall Street should disclose bad news to investors and where the boundary lies between acceptable corporate public relations and outright fraud.

Wall Street has a lengthy history of putting a positive spin on bad news, mistakes and miscalculations. As reported Oct. 12 by the Wall Street Journal, two years following the onset of the financial crisis and countless government investigations of investment firms and their stock brokers, Cioffi and Tannin are the only individuals of a major Wall Street firm to face the threat of prison. The short list underscores the difficulty of assigning blame for Wall Street’s errors, says the Wall Street Journal article.

At the heart of the Cioffi and Tannin case is the issue of whether the two men misled investors with the intent to defraud them. Among the ammunition prosecutors will present:

• Emails and phone recordings from an April 2007 conference call in which Cioffi states he is “comfortable” with the funds’ performance. Several days prior to that call, however, Cioffi emailed a colleague about an internal report on the funds, writing that if the information prepared was “ANYWHERE CLOSE to accurate, I think we should close the funds now.”
• Cioffi allegedly tells investors during the April 2007 investor conference there was just a “couple of million dollars” of redemptions requested by investors in June. In reality, one investor, Concord Management, previously informed Bear Stearns it wanted to withdraw its entire $57 million investment.
• Testimony from investors who relied on statements about how much Cioffi and Tannin invested their own personal money in the funds. To raise more money from investors, prosecutors say Tannin allegedly told investors several times in March 2007 that he was “adding more” of his own money into one of the funds, but never did.
• Statements by Cioffi, who is accused of telling Bear Stearns brokers that he had $5.5 million of his money in one of the funds in May 2007 when, in fact, he had taken out $2 million months earlier.
• Emails and transcripts that point to additional motive by Cioffi to keep the funds alive because they served as collateral for a real-estate loan on Sarasota, Florida, condominium he was building.

The case is U.S. v. Cioffi and Tannin 08-415 in U.S. District Court, Eastern District of New York (Brooklyn).

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The collapse of the auction rate securities market in February 2008 left millions of retail and institutional investors stuck with an investment that no one wanted to buy. Nearly a year later, little has changed for many ARS investors.

Many investors were under the impression auction-rate securities were safe, low-risk investments - financial products similar to a money market fund yet with a slightly higher return. At the same time, auction rate securities were supposed to be easy to sell - for their face value - at weekly or monthly auctions.

That didn’t happen, of course. Instead, the ARS market came to a standstill in 2008, and investors got stuck with securities that today pay extremely low yields. In some cases, the auction-rate securities will never mature, leaving ARS holders with the prospect of never getting their money back unless they part with their investments for rock-bottom prices.

As reported Oct. 11 by the New York Times, the biggest losers in the auction-rate securities debacle are institutional investors - corporations that bought the securities and were never covered by the settlements that many Wall Street firms made earlier this year to reimburse individual investors.

To a lesser extent, some retail investors are still stuck with their securities, either because their brokerage firm refused to settle or because they’ve moved from one firm to another and neither is willing to buy back the securities.

According to the New York Times article, some corporate ARS purchasers are in a Catch 22 position. They can’t sue the brokerages that misrepresented the auction-rate investments as safe and secure investments because of the Private Securities Litigation Reform Act law - a law that was strongly backed by corporate America as a way to curb frivolous lawsuits.

Specifically the Private Securities Litigation Reform Act dictates that when a case is filed it must be very detailed about the alleged fraud or it will be immediately dismissed. In many cases, though, a plaintiff needs access to inside information to make a claim with such information, which could be found in company files. Oftentimes, however, a plaintiff has no way to access such details before the case is thrown out, says the New York Times.

The latest reversal for investors came late last month when a federal judge dismissed a case filed against Raymond James, a brokerage firm that underwrote and sold auction-rate securities. In that case, a customer claimed that a broker at Raymond James misled her about the safety of auction-rate securities. As an underwriter and conductor of the auctions for the securities, the customer alleged that Raymond James was involved in a fraud to unload the securities before the market for them collapsed in February 2008.

The judge in the case says that’s not enough. The broker, he states, worked for one Raymond James company; the underwriting was done by a different Raymond James firm. “There is no evidence in the complaint,” the judge wrote, “from which the court can infer that the Raymond James entities had even the most basic understanding of the others’ business.”

To many, such reasoning sounds a little like a pitch to disguise the obvious. If the plaintiff could prove that one Raymond James subsidiary lied about the securities while another one profited from selling them the end result would likely prove the investor’s allegations of fraud. Yet, if there is no discovery of evidence allowed, we will never know whether such a claim could be proved.

The plaintiff in the case has until Oct. 16 to file an amended complaint that can pass muster under the 1995 law. The lawyer representing the investor says a new complaint will indeed be filed.

Tell us about your situation with auction rate securities by leaving a message in the Comment Box below or via the Contact Us form. We want to counsel you on your legal options.

Ralph Cioffi and Matthew Tannin are the leading players in perhaps one of the most eagerly awaited trials in Wall Street history. Cioffi and Tannin are the former managers of two failed Bear Stearns hedge funds
- the High-Grade Structured Credit Fund and the Enhanced Leveraged Fund - that ignited the market meltdown in 2007. Now it appears there’s a new twist to their trial, with Cioffi accused of trying to get his hands on loan documents in Florida ahead of the government’s subpoena.

Prosecutors have long alleged that Cioffi, with Tannin’s help, illegally used his investment in his own hedge funds as collateral for a loan from Busey Bank in Ft. Myers, Fla., which was to help end a foreclosure threat against a Florida condominium development owned by Cioffi and his brother.

According to an article appearing Oct. 2 in Fortune magazine, Cioffi made a fast trip to Florida on Sept. 18 for the purpose of allegedly getting his hands on the original copies of the loan documents from Busey Bank officials.

Prior to the trip, the article says Cioffi called a Busey Bank employee on Sept. 8 to locate the loan records. On Sept. 16, another call was placed by Cioffi to the employee. During their conversation, Cioffi reportedly told the individual that he would be travelling to Florida and wanted to accompany her to the “bank’s storage facility” so that he could personally look for the documents in question. On Sept. 17, the government informed the federal court about the subpoena it had issued to Busey Bank regarding the Cioffi loan documents.

On Sept. 18, Cioffi did in fact fly to Florida to try and retrieve the documents. In an alleged voicemail message left for a bank employee, Cioffi said: “Jen, Hi, Ralph Cioffi calling, it’s Friday morning, it’s 8:30 a.m., I’m actually on my way to Ft. Myers from Newark Airport, New Jersey. I land about 12:15. I’ll call you when I land. I was hoping to in the meantime you might have been able to find the file and if you had, I would love to come by and get a fax copy of the document or the document itself. In any event, my number is [number redacted], if in fact you wanted to call me and leave me a message one way or another. If I don’t hear from you I’ll check in when I land. Thanks.”

When a bank employee informed Cioffi his original loan documents had not been located, Cioffi asked that the originals be sent by “Federal Express to his residence in Tenafly, New Jersey.”

The U.S. Attorney’s Office in Brooklyn has since written a letter to U.S. District Judge Frederic Block, stating that, “Cioffi’s attempt to take possession of the original documents before Busey Bank could turn them over to the government, pursuant to a valid federal subpoena, is troubling and could have impeded the government’s ability to obtain the original loan documents. Such conduct, depending on the defendant’s motive, may be punishable as a felony under federal law.”

Meanwhile, prosecutors are calling Cioffi’s latest actions consistent with a cover-up. As for Cioffi, he contends the Florida trip was key to exonerating himself.

A court will decide on who’s right or wrong on Oct. 13, when the much-awaited trial of Ralph Cioffi and Matthew Tannin officially gets underway.

The case is U.S. v. Cioffi, 08-cr-00415, U.S. District Court, Eastern District of New York (Brooklyn).

Tell us about your situation with Bear Stearns by leaving a message in the Comment Box below or via the Contact Us form. We want to counsel you on your legal options.