Cioffi & Tannin, Bankers That Broke The World, Part 2

Part Two of Our Geek Tragedy…


ACT TWO, SCENE ONE: Ralphie Heads for the Hills

On March 23rd, Ralph’s fears drove him to start transferring his own money out of the Funds.  His first transfer on the 23rd moved $2 million of his $6 million investment into another Bear Stearns hedge fund, called “Structured Risk Partners,” or “SRP,” a fund that Ralph would become responsible for overseeing days later as of April 1, 2007.  Ralph knew that this new hedge fund had recently experienced returns far superior to that of his other funds, saying to a team member: “At least SRP keeps getting better.”

And once again there should be no one surprised that Ralph never bothered to mention to the investors that he had transferred his $2 million out of the Enhanced Fund and into SRP, and in fact, he told Bear Stearns that he had only made the switch so that he, as the fund’s new manager would have a personal investment in the fund… a very convenient and therefore plausible excuse at the time.

ACT TWO, SCENE TWO: Major Investors See Cracks in the Armor

Both of Ralph’s Funds posted losses for March 2007.  The High Grade Fund reported a return of -3.71% and the Enhanced Fund returned -5.41%.  One of the three largest investors in the Funds told Ralph on April 18th that it was considering pulling out its $57 million investment.

In an obvious attempt to mollify the investor and hopefully persuade him to stay the course, Ralph told the investor that he and the other portfolio managers had $8 million invested in the Funds and that this represented one-third of their liquid net worth, but he neglected to mention his own recent withdrawal of $2 million from the Enhanced Fund.

It didn’t work, and one can only imagine how Ralph and Matt felt that next day when the investor notified the pair that it would be redeeming its entire investment in the Funds.  The amount of that entire investment was $57 million.  The lies weren’t working anymore.


It was April 19, 2007, when a member of the Fund’s portfolio management team produced a report showing that the CDOs the Funds had invested in, were worth significantly less than had been previously determined.

Three days later, on April 22, Matt told Ralph that they should either shut the Funds down or at the very least significantly change the Funds’ investment strategies.  In an email message Matt told Ralph and another manager of the Funds that over the last few months, in his opinion, the Funds should have either been closed or they needed to “get very, very aggressive.”

Matt’s view was that the Funds should be closed, saying prophetically in that message:

“The sub-prime market looks pretty damn ugly… If we believe the report is ANYWHERE CLOSE to accurate I think we should close the funds now. The reason for this is that if the report is correct then the entire sub-prime market is toast.  If AAA bonds are systematically downgraded then there is simply no way for us to make money – ever.”

Matt concluded that, “Caution would lead us to conclude the report is right – and we’re in bad, bad shape.”


He also noted that there would be significant hurdles that they would meet if they tried to adopt a “very aggressive” investment strategy in an attempt to make up for the losses, including the very real possibility that few if any of the investors would be likely to remain in the Funds.

Matt then asked, “Who do we talk to about this?  The President?  The Co-President? Outside counsel?  And here we have to be careful because our outside counsel is Bear Stearn’s counsel, NOT our counsel – This is another very big issue we at least need to think about.”

Matt knew he was up to his hindquarters in alligators because he sent his email outside the Bear Stearns system from his personal email account and to the personal accounts of Ralph’s wife and the wife of the other manager.

The following day, Matt cautioned Ralph about the importance of not disclosing anything to any of the other employees that would give them the idea that the Funds were in such serious trouble.  He said that the two of them would do what they had to do, but he wanted to make sure that the rest of the staff remained “as focused as possible.”


ACT TWO, SCENE THREE: Once You Start It’s Hard to Stop

On April 24, Ralph and Matt were still lying their asses off, telling everyone involved that they were confident that the funds were in good shape and would continue to be successful.  And two days later, on April 25th, Ralph and Matt hosted an investor conference call during which they must have been shaking in their boots, but still managed to deliver their lies with impressive calm.

Matt told the investors on the call: “So, from a structural point of view, from an asset point of view, from a surveillance point of view, we’re very comfortable with exactly where we are… the structure of the Fund has performed exactly the way it was designed to perform,” and “it is really a matter of whether one believes that careful credit analysis makes a difference, or whether you think that this is just one big disaster. And there’s no basis for thinking this is one big disaster.”

Ralph chimed in to address the issue of investor redemptions, which he characterized on the conference call as the big – obviously, the question that we’ve been getting from a number of investors . . . .”   He answered that question by falsely claiming that, “the next big redemption date would be June 30th, and as of now, I believe we only have a couple million of redemptions for the June 30 date. . . . I believe we have about 45 million in subscription, and 25 of that is from Bear Stearns and those will be for, I believe those are all for May 1st.”

It goes without saying that Ralph never mentioned the $57 million redemption that had already been submitted by one of the major investors.  He also left out the additional $67 million in redemptions scheduled for April 30th and May 31st.  As to the June 30th redemptions that he referenced as being “a couple million,” that number was actually $47 million.  At this point the idea of mentioning that he had pulled out his own $2 million 24 days prior, must have seemed… well, sort of silly.


The Funds were now collapsing, but Ralph and Matt had dug their graves so deeply by this point that they must have figured that the only way up was down… if that makes any sense.

In May, Ralph went to Bear Stearns’ Pricing Committee and asked its members to use higher values for some of the assets held by the Funds.  The Pricing Committee is the group charged with overseeing the calculations of the Fund’s NAV.  Ralph wanted the committee to use values that would have shown a return of – 6.5% for the Enhanced Fund, but when the committee balked, asking Ralph for the basis for his request, he produced none.  He was scrambling.  The committee’s calculations showed a return of -18.97%.

On May 31st, Matt asked Ralph which return to give to one of the major investors, the -6.5% or the -18.97?

Ralph and Matt continued to lie about the Funds’ financial picture right up until the collapse of both Funds.  On May 3rd, Matt told one of the Repo lenders that they didn’t anticipate any large redemptions in the near future.

ACT TWO, SCENE FOUR: And Now the End is Near…

It was a sunny summer morning in New York City, June 7, 2007, when investors were told that they could no longer redeem their investments in the Enhanced Fund, regardless of whether or not they had already submitted redemption requests.  On June 17, 2007, investors were provided the final April 2007 return of -5.09% for the High Grade Fund and -18.97% for the Enhanced Fund.

On June 26, 2007, investors were told that they could no longer redeem their investments in the High Grade Fund, regardless of whether or not they had already submitted redemption requests.

Eventually, investors were told that the Funds had both lost 100% of their respective values, resulting in a total investor loss of approximately $1.4 billion.

The lady singing was not on Jenny Craig…


EPILOGUE: The SEC Gets Into the Act… Better Late Than… Never Mind.

The SEC’s investigation during the summer of 2007 showed that two items were missing… Matt’s laptop computer and one of Ralph’s notebooks in which he used to write notes.  Probably just an accident.

Matthew Tannin and Ralph Cioffi have been charged with Conspiracy to Commit Securities Fraud and Wire Fraud, Securities Fraud, Insider Trading, Wire Fraud, and the government has made clear that it will seek forfeiture under United States Code, Section 2461(c), which require any person convicted of such offenses to forfeit any property constituting or derived from proceeds obtained directly or indirectly as a result of such offenses.  Rest assured, they will be left with nothing, and it seems clear they will both go to jail.

On June 18, 2009, Ralph Cioffi and Matthew Tannin were indicted by a Grand Jury and the case was filed in United States District Court, Eastern District of New York.  These are complicated cases and they take time to prepare as a result.  But not that much time.  And they never “go away”.  Our government is funny about that… they just keep going and going and going.

Bear Stearns was the first to implode, but they were certainly not the last.  The use of leverage and investment in derivatives meant that when the first of the sub-prime loans began to default, the losses were far greater than the amount of the underlying loans.  Leverage produces greater levels of return on investment when the market is going up, but when the markets reversed themselves, that leverage had the opposite effect and dramatically magnified the losses.  Other factors would add to the problem like gasoline adds to a fire.


In other words, it WAS NOT THE BORROWERS that caused the global economic crisis… it was THE BANKS that caused our country so much pain… pain that will not end for many years.  Investment banks and commercial banks… but banks.

What these bankers did and the resulting loss of untold trillions in wealth, will leave scars on this nation that will still be seen in 50 years and maybe longer.  What they did ruined the lives of millions and continues to cause far too many to take their own lives.  They caused a tragedy in this country that we will all one day see as being among the most devastating in our nation’s history.

But you can know that the bankers… both Wall Street’s and the commercial bankers won’t get away with what they’ve done.  While perhaps not all, many will go to jail as a result of what they did and what they caused.  Unfortunately, that’s all we’ve got left, and although it might offer little solace to those whose lives were ruined as a result of what these white collar bank robbers did, it’s better than the alternative.

From the beginning, the banking lobby has tried to blame this crisis on everyone but the banks.  It was the banking lobby that started the P.R. campaign that blamed borrowers… then they blamed mortgage brokers… then sub-prime lenders… everyone but themselves.

Today, the banks that were seen as being “too big to fail” have been allowed to get even bigger.  They are still insolvent and will need to be placed in receivership at some point.  The taxpayers are going to take this hit no matter what.  This simply is not about one homeowner paying to bail out another.  It’s about all of us having to bail out a financial system so badly broken that at this point we don’t even know what it will truly cost to fix what the banks have so utterly destroyed.

The Justice Department currently has 570 open cases related to Wall Street’s meltdown.  So, while the economic meltdown is far from over… the story of the true financial criminals that actually caused our nightmare is only beginning to be told.


COMING SOON… The next installment in our dramatic series,

The Bankers That Broke the World.

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