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Thursday, June 19, 2008
Sifting Through the SEC Charges of Two Former Bear Stearns Managers
Ken Sweet
FOXBusiness
In a separate indictment released on Thursday, the Securities and Exchange Commission charged the same two ex-Bear Stearns fund managers with defrauding investors as the subprime mortgage market began to collapse. The civil indictment comes at the same time as the U.S. Justice Department’s criminal indictment.
The SEC charged Ralph Cioffi and Matthew Tannin with defrauding and/or deceiving investors in their hedge fund, costing investors more than $1 billion after it was all over.
If found guilty, the managers would be banned from engaging in securities transactions and would have to pay back any profits they made by allegedly hiding the hedge funds' problems from investors. The SEC is also seeking undisclosed civil damages, according to the indictment.
Like the Justice Department, the SEC alleged that Cioffi and Tannin deliberately tried to cover up the problems with their investments and attempted to pull their personal money out first before trying to recover investors’ money.
“As the funds suffered increasing losses to their value… (Cioffi and Tannin) fraudulently concealed from (investors) the full extent of the funds’ deepening troubles,” the indictment said.
Cioffi and Tannin were the two fund managers in charge of the Bear Stearns' hedge funds which imploded last summer. Those hedge funds primarily invested in fixed-income securities, most notably subprime-mortgage backed securities.
“From late 2006 through June 2007, Cioffi became increasingly indiscriminate in the management of the funds,” the indictment said. “During that time Cioffi started by even-more-risky investments such as (Asset Backed Securities) significantly backed by subprime securities rated (below investment grade)…. Tannin noted Cioffi’s lack of buying discipline, in a February 5, 2007 e-mail saying “Unbelievable. (Cioffi) is unable to restrain himself.”
Like the Justice Department's indictment, the SEC indictment relies heavily on confiscated e-mail and conference call transcripts – some of which are not disclosed in the U.S. Justice Department’s version. Also of note is the heavy reliance on a third undisclosed fund manager at Bear Stearns. That person has not be named or charged.
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FOX Translator
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Think telemarketer. Except, it's much worse because you can't avoid this call. Instead, when you get one, it's time to pay up, because the bet you placed with borrowed money is eating itself.
Buying stocks on margin is risky because you're essentially "playing" with someone else's money. If the shares you purchased tank, your losses will likely be more than if you had bought the shares with your own cash. This is why the New York Stock Exchange and the Nasdaq impose certain restrictions on the practice.
Initially, you¿re only allowed to borrow half of the money from your broker when buying on margin. You set up a margin account and from then on must keep a maintenance balance of at least 25% of the market value of your stocks.
If the market value of your investment falls below this minimum, you're required to make up the difference by either depositing money into your account or selling some of the stock. If your broker notifies you that you've dipped below this minimum, it's called a margin call.
If you fail to adjust your account accordingly, the broker is authorized to sell shares in your account to make up the difference. The broker can even sell other stock in your margin account to make up for the loss that selling the shares didn't cover.
As an example, say you buy $8,000 in stocks of any given company. You borrow the maximum $4,000 from your broker and pay the rest yourself. Now, if and when the total value of these shares changes, you must make sure you maintain at least $2,000 (25%) in equity. In other words, if the total value were to drop below $6,000, you¿d be in trouble since you only put in $4,000 of your own money to begin with.
