Ex-Bear Stearns Manager Interfered With Probe, Prosecutor Says

By Patricia Hurtado

Oct. 18 (Bloomberg) -- One of two former Bear Stearns Cos. hedge-fund managers charged with misleading investors about the health of funds that failed last year tried to ``influence'' witnesses during the bank's probe, prosecutors said.

At a court hearing yesterday in Brooklyn, New York, for the former managers, Ralph Cioffi, 52, and Matthew Tannin, 46, Assistant U.S. Attorney Patrick Sinclair said prosecutors were ``aware of instances where the defendant here has attempted to influence the statements of potential witnesses in the course of the Bear Stearns internal investigation.''

``It's a significant concern'' that the practice will continue during a criminal investigation and a civil lawsuit brought by the U.S. Securities and Exchange Commission, Sinclair told U.S. District Court Judge Frederic Block. Prosecutors asked to join and delay the civil action filed in June.

Sinclair wouldn't identify which of the two former managers he was referring to, when asked after the hearing. James McMahon, head of the securities fraud section of the Brooklyn U.S. Attorney's Office, also declined to comment.

Marc Weinstein, a lawyer for Cioffi, said, ``Our client denies any allegations regarding any attempts to influence witness testimony in connect with this case.''

Cioffi wasn't in court yesterday and Tannin declined to comment after the hearing. Susan Brune, one of Tannin's lawyers, declined to comment after court yesterday about Sinclair's comments to the judge. Andy Merrill, a spokesman for Mr. Tannin, also declined to comment.

Implosion

The implosion of New York-based Bear Stearns helped trigger the credit crunch and the eventual collapse and sale of the investment bank to JPMorgan Chase & Co. The government has been investigating possible fraud by banks and mortgage firms whose investments in subprime loans and securities plunged in value, causing losses that now total almost $450 billion.

Block yesterday granted prosecutors permission to join the SEC's civil case. Block postponed ruling whether to put the civil case on hold until the criminal prosecution has concluded.

Sinclair argued for postponing the SEC case, saying it could hamper prosecutors and investigators in the criminal proceeding. He repeated the government's intention to file additional criminal charges by December.

``We know how much of a diversion of time that can be,'' Sinclair said, referring to disputes over evidence in civil cases. He said this case is especially complicated because it involves ``discovery from some of the largest financial institutions undergoing the most major crisis that they have ever faced before.''

Civil Case

Lawyers for both men yesterday urged Block to let the civil case go forward. They noted that no trial date has been set in the criminal case and that prosecutors said they intended to bring additional charges, which could cause delays.

``The SEC has chosen to bring its case, which should mean that it's prepared to go forward,'' Brune told Block. ``The government has been investigating this case for a year. They have had a massive ability to get unilateral access to all of the witnesses.''

Weinstein said the government hasn't turned over any evidence related to Barclays PLC, the London-based bank referenced anonymously in SEC charging documents as a victim of the defendants' scheme.

``There are allegations in here that our clients hoodwinked a major financial global institution, yet they don't have a single page to turn over directly from their file,'' he said.

The SEC case describes ``specific allegations that these defendants misled what they represent to Bank No. 1,'' Weinstein said. ``Everyone knows it's Barclays.''

Bank No. 1

Sinclair confirmed that Bank No. 1 is Barclays.

``I can represent to the court that by the end of this week, the defendants will receive discovery from Barclays,'' he told the judge,,

Barclays, the U.K.'s third-biggest bank, claimed in a lawsuit it filed last year in federal court in New York that it was misled by Cioffi and Tannin about the health of Bear Stearns's so-called enhanced fund managed.

Bear Stearns, Cioffi and Tannin are named as defendants in the case. The British bank accused Cioffi of withdrawing his own $2 million investment at the same time Bear persuaded Barclays to double its stake, according to the complaint.

$2 Million

Cioffi, now with Tenafly, New Jersey-based RCAM Capital LP, left Bear Stearns amid inquiries by prosecutors and the SEC into whether he withdrew $2 million from the funds four months before their collapse in July, according to the indictment.

The money, one third of the amount he invested in one of the funds, was switched to another fund he set up, prosecutors said.

The former hedge-fund manager was charged with one count of insider trading based on the $2 million redemption, prosecutors said. He was relieved of his duties as a fund manager in June, when his funds' subprime investments began to unravel.

Both he and Tannin, who have pleaded not guilty, face as long as 20 years in prison if convicted of conspiracy. Cioffi faces an additional 20-year term if found guilty of insider trading.

Cioffi managed the two funds that collapsed, and Tannin served as his chief operating officer. The funds, which put most of their assets in subprime mortgage-related securities, failed in June 2007 when prices for collateralized-debt obligations linked to home loans fell amid rising late payments by borrowers with poor credit or heavy debt.

In March, three months after Cioffi left Bear Stearns, the 85-year-old firm was purchased by New York-based JPMorgan for about $1.4 billion in stock. Bear Stearns, worth almost $25 billion in January 2007, was pushed to the brink of insolvency when speculation about a cash-shortage prompted customers and lenders to flee.

The criminal case is U.S. v. Cioffi, 08-00415, and the civil case is Securities and Exchange Commission v. Cioffi, 08- CV-2457, U.S. District Court, Eastern District of New York (Brooklyn).

To contact the reporter on this story: Patricia Hurtado in New York at pathurtado@bloomberg.net.