Business

Former financial stars handcuffed

Former Bear Stearns Co. managers Ralph Cioffi and Matthew Tannin dazzled their employers and Wall Street before the allegations of fraud and deceit that had them hauled away in handcuffs Thursday.

Cioffi, 52, and Tannin, 46, managed $20 billion in assets and racked up 40 consecutive months of profits between 2003 and 2007 at one of two funds that invested in mortgage-backed bonds and collateralized debt obligations, or CDOs. Cioffi's success earned him at least $10 million in 2006, placing him among the highest-paid Bear Stearns employees.

Their fall began when both funds collapsed last June, triggering the subprime mortgage crisis. U.S. prosecutors and the Securities and Exchange Commission investigated both men for almost a year before agents arrested Cioffi at his home in Tenafly, N.J., and Tannin at his Manhattan apartment.

“For so long, there was this aura about him that he was one of the smartest and most knowledgeable bond investors the street,” attorney Steven Caruso, who represents investors in arbitration claims against the funds, said of Cioffi. “Being led out of your house in handcuffs is the clearest illustration of the proverbial fall from grace.”

Cioffi lives with his wife, Phyllis, and their four children in a $2.68 million house in Tenafly, property records show. They paid $7.1 million in 2006 for property in Naples, Fla., and $2.1 million in 1995 for a condominium in Portsmouth, R.I., and own a condominium valued at $1.3 million in Ludlow, Vt., according to the records.

The criminal charges of mail fraud and conspiracy are the first prosecution stemming from a federal investigation of last year's mortgage-market collapse. Cioffi was also charged with insider trading in the indictment, which cites a series of e-mails between the two men.

Cioffi managed the two funds that collapsed, and Tannin served as his chief operating officer.

They both face as much as 20 years in prison if convicted of conspiracy, and Cioffi faces an additional 20-year term if found guilty of insider trading.

Cioffi's lawyer criticized Brooklyn U.S. Attorney Benton Campbell for ordering the arrests, saying it was an effort by the government to make an example of innocent men.

“Because his funds were the first to lose might make him an easy target, but doesn't mean he did anything wrong,” said defense lawyer Edward Little in a statement.

Susan Brune, a lawyer for Tannin, also said her client is innocent and that he “is being made a scapegoat.”

Three months after Cioffi left Bear Stearns in December, the 85-year-old company was purchased by JPMorgan Chase & Co. for about $1.4 billion in stock.

Demands by clients and lenders for payment had threatened the firm, which was worth almost $25 billion as recently as January 2007, with bankruptcy.

“Hedge fund managers cannot lie to their own investors,” Antonia Chion, an SEC attorney overseeing the agency's lawsuit, said in a statement. “Even sophisticated investors look to fund managers to speak truthfully.”

Cioffi had built a record of success over more than two decades at Bear Stearns after growing up in South Burlington, Vt. He was a running back and guard in high school, and earned A's in math and economics.

He graduated in 1978 from St. Michael's College in Vermont, where he studied business administration and worked on bodybuilding. Cioffi joined Bear Stearns in 1985, and turned into a pioneer in structured finance, one of Wall Street's fastest-growing businesses over the past decade.

He helped introduce the first offerings of several complex financial products used widely today, including principal-protected notes. They are mostly backed by mortgages or corporate debt and use non-risky assets to guarantee that investors will get at least their principal back.

Tannin majored in philosophy at Bucknell University in Pennsylvania and earned a law degree at the University of San Francisco. He joined Bear Stearns in 1994, and specialized in collateralized debt obligation.

Former Bear Stearns Co. managers Ralph Cioffi and Matthew Tannin dazzled their employers and Wall Street before the allegations of fraud and deceit that had them hauled away in handcuffs Thursday.

Cioffi, 52, and Tannin, 46, managed $20 billion in assets and racked up 40 consecutive months of profits between 2003 and 2007 at one of two funds that invested in mortgage-backed bonds and collateralized debt obligations, or CDOs. Cioffi's success earned him at least $10 million in 2006, placing him among the highest-paid Bear Stearns employees.

Their fall began when both funds collapsed last June, triggering the subprime mortgage crisis. U.S. prosecutors and the Securities and Exchange Commission investigated both men for almost a year before agents arrested Cioffi at his home in Tenafly, N.J., and Tannin at his Manhattan apartment.

“For so long, there was this aura about him that he was one of the smartest and most knowledgeable bond investors the street,” attorney Steven Caruso, who represents investors in arbitration claims against the funds, said of Cioffi. “Being led out of your house in handcuffs is the clearest illustration of the proverbial fall from grace.”

Cioffi lives with his wife, Phyllis, and their four children in a $2.68 million house in Tenafly, property records show. They paid $7.1 million in 2006 for property in Naples, Fla., and $2.1 million in 1995 for a condominium in Portsmouth, R.I., and own a condominium valued at $1.3 million in Ludlow, Vt., according to the records.

The criminal charges of mail fraud and conspiracy are the first prosecution stemming from a federal investigation of last year's mortgage-market collapse. Cioffi was also charged with insider trading in the indictment, which cites a series of e-mails between the two men.

Cioffi managed the two funds that collapsed, and Tannin served as his chief operating officer.

They both face as much as 20 years in prison if convicted of conspiracy, and Cioffi faces an additional 20-year term if found guilty of insider trading.

Cioffi's lawyer criticized Brooklyn U.S. Attorney Benton Campbell for ordering the arrests, saying it was an effort by the government to make an example of innocent men.

“Because his funds were the first to lose might make him an easy target, but doesn't mean he did anything wrong,” said defense lawyer Edward Little in a statement.

Susan Brune, a lawyer for Tannin, also said her client is innocent and that he “is being made a scapegoat.”

Three months after Cioffi left Bear Stearns in December, the 85-year-old company was purchased by JPMorgan Chase & Co. for about $1.4 billion in stock.

Demands by clients and lenders for payment had threatened the firm, which was worth almost $25 billion as recently as January 2007, with bankruptcy.

“Hedge fund managers cannot lie to their own investors,” Antonia Chion, an SEC attorney overseeing the agency's lawsuit, said in a statement. “Even sophisticated investors look to fund managers to speak truthfully.”

Cioffi had built a record of success over more than two decades at Bear Stearns after growing up in South Burlington, Vt. He was a running back and guard in high school, and earned A's in math and economics.

He graduated in 1978 from St. Michael's College in Vermont, where he studied business administration and worked on bodybuilding. Cioffi joined Bear Stearns in 1985, and turned into a pioneer in structured finance, one of Wall Street's fastest-growing businesses over the past decade.

He helped introduce the first offerings of several complex financial products used widely today, including principal-protected notes. They are mostly backed by mortgages or corporate debt and use non-risky assets to guarantee that investors will get at least their principal back.

Tannin majored in philosophy at Bucknell University in Pennsylvania and earned a law degree at the University of San Francisco. He joined Bear Stearns in 1994, and specialized in collateralized debt obligation.

  Comments