Bear Stearns executives indicted on fraud

Two Bear Stearns executives were indicted on fraud charges yesterday over the collapse of hedge funds that lost investors $1.4 billion.

The arrests of Ralph Cioffi and Matthew Tannin are part of an FBI crackdown on mortgage fraud in the US. The two were led out in handcuffs in an early-morning raid.

According to the government, the men lied about the health of the fund to investors, in "the ultimately futile hope that the funds' bleak prospects would change and that their incomes and reputations would remain intact". This while knowing the funds were on the verge of collapse.

Deputy attorney general Mark Filip said: "Even though they knew that the funds were in danger of collapse because of the decline of the subprime mortgage market, they misled investors about the financial prospects of the funds by making misrepresentations about the amount of money other investors were withdrawing and about the extent of their personal investment in the funds."

The pair were indicted on eight counts of fraud and Mr Cioffi faces an additional charge of insider trading for withdrawing $2 million (£1 million) of his own money before the fund's collapse – while telling other investors there were no problems.

The government claims the two knew of problems in the subprime market in March, but continued to reassure investors.

In email exchanges detailed in the indictment document, Mr Tannin urged Mr Cioffi in April to shut the funds down saying: "the subprime market looks pretty damn ugly… I think we should close the funds now. If AAA bonds are systematically downgraded then there is simply no way for us to make money - ever."

Eventually, both had to tell investors the hedge funds had lost 100 per cent of their value – representing a loss of $1.4 billion (£0.7 billion) to investors.

They face separate civil proceedings brought by the US securities and exchange commission.

The government made the arrests as part of Operation Malicious Mortgage, aimed at investigating mortgage fraud, which saw 60 people arrested yesterday.

The miss-selling of subprime mortgages in the US has been blamed for the subsequent credit crunch as the property market took a downturn and thousands of homeowners were unable to keep up the repayments on their loans.

From the beginning of March, when the operation was launched, a total of 406 defendants have been charged. The FBI estimates that approximately $1 billion (£0.5 billion) in losses were inflicted by the mortgage fraud schemes in these cases.

"Mortgage fraud and related securities fraud pose a significant threat to our economy, to the stability of our nation's housing market and to the peace of mind of millions of American homeowners," Mr Filip added.