Bear Stearns Facing U.S. Prosecutors

In what could be the first of many charges brought against investment managers implicated in the subprime mortgage crisis, two former hedge-fund managers with Bear Stearns could be indicted as early as this week.

The U.S. attorney’s office in Brooklyn is reportedly completing interviews of witnesses regarding the actions of Ralph Cioffi and Matthew Tannin who managed mortgage bond portfolios for Bear Stearns that imploded, according to sources quoted by The Wall Street Journal.

Prosecutors are investigating whether Cioffi and Tannin purposely misled investors by being overly optimistic about funds while privately confiding in colleagues that they did not think the funds would survive the mortgage market. Bear Stearns’ investigation could be one of many as other mortgage company executives face investigation for misleading clients and contributing to the mortgage-market meltdown.

According to the WSJ, Cioffi and Tannin’s missteps started in March 2007 when Cioffi allegedly moved $2 million of his own money out of the riskier funds he oversaw. In April, Cioffi and Tannin voiced their optimism to investors to quell concerns stemming from mounting mortgage problems. The riskier fund fell 23 percent in April 2007 and in June, Cioffi and Tannin did not allow investors to take their money out of the fund.

That same month, Bear Stearns brought in $1.6 billion in less-risky funds to recover the funds but filed for bankruptcy a month later. Last month Bear Stearns was subsumed by J.P. Morgan.