Ralph Cioffi: Bear Stearns Indictment, Acquittal, and SEC Settlement

The Ralph Cioffi Bear Stearns case was the first major criminal prosecution to come out of the 2008 financial crisis, and it ended in acquittal. Cioffi, a former Bear Stearns Asset Management executive, ran two hedge funds whose collapse in the summer of 2007 wiped out roughly $1.6 billion in investor capital. A federal jury in Brooklyn cleared him and co-manager Matthew Tannin of conspiracy and securities fraud in November 2009. Cioffi later settled parallel civil charges with the Securities and Exchange Commission in 2012 without admitting wrongdoing.

The Funds and How They Failed

Cioffi launched the Bear Stearns High-Grade Structured Credit Strategies Fund in March 2003. It invested in highly rated tranches of collateralized debt obligations backed by subprime mortgages and other debt, and posted no losing months for its first 40 months of operation.¹ A second, more aggressive vehicle, the Enhanced Leverage Fund, followed in August 2006. By late that year the two funds together held about $1.4 billion in assets.²

Both funds used heavy leverage to amplify returns on nominally safe AAA- and AA-rated securities. When subprime delinquencies surged in early 2007, the value of the underlying collateral dropped and the repo lenders financing the funds’ positions demanded more margin. The funds could not meet those calls, and forced sales pushed prices down further.³

In June 2007, Bear Stearns Asset Management reported a 19 percent drop in net asset value for the Enhanced Leverage Fund and froze investor redemptions. Bear Stearns extended a $1.6 billion loan to the older High-Grade Fund to pay off its repo lenders, but left the Enhanced Leverage Fund to fail on its own. By the end of July the High-Grade Fund had lost 91 percent of its value and the Enhanced Leverage Fund had lost essentially everything. Both filed for bankruptcy on July 31, 2007.³

The Criminal Charges

On June 19, 2008, a federal grand jury in the Eastern District of New York unsealed an indictment charging Cioffi and Tannin with conspiracy and securities fraud. Cioffi alone faced an additional count of insider trading. Conviction on the most serious charge carried a potential 20-year prison term.²⁴

Prosecutors built their case largely around internal emails and statements to investors during the spring of 2007. The government alleged that Cioffi and Tannin privately recognized how bad the subprime downturn had become while publicly reassuring investors and urging them to keep their money in — or add more. The indictment pointed to an April 2007 investor conference call in which the managers said they were “quite comfortable” with the portfolio and described it as a good time to take on risk, just three days after Tannin had sent internal emails suggesting the funds should be shut down.⁵

The SEC’s parallel civil complaint alleged that while the funds’ monthly performance summaries reported direct subprime exposure of six to eight percent, total exposure, including indirect holdings through CDOs, was approximately 60 percent. Prosecutors also alleged that Cioffi told his team not to disclose how difficult February 2007 had been, and that Tannin falsely told at least one investor he was increasing his personal stake.⁶⁵

The Insider Trading Count

The insider trading charge against Cioffi centered on his personal money. According to the indictment, in March 2007 he redeemed $2 million of his roughly $6 million stake in the Enhanced Leverage Fund and transferred it into a different Bear Stearns hedge fund that was profiting from a short position on subprime securities. Prosecutors alleged he did not disclose the transfer and continued to represent that he held approximately $6 million in the fund.² Legal commentators described the theory as novel, possibly the first attempt to apply insider trading law to a private redemption from a hedge fund. Judge Frederic Block denied a defense motion to dismiss the count in July 2009.⁶

The Trial and Acquittal

The trial began in the fall of 2009 in Brooklyn federal court and ran about a month. The prosecution leaned heavily on the email trail between Cioffi, Tannin, and their colleagues. Dane Butswinkas represented Cioffi and Susan Brune represented Tannin, and the defense worked to reframe the same messages as the record of managers who genuinely believed their funds could recover.⁷

Jurors agreed that the emails were ambiguous. Forewoman Jenny McCaughey later said the defense showed the emails “cut both ways” because “they said one thing and another thing.” The defense also presented exhibits showing the two men working around the clock, including at 4 a.m., to save the funds. Juror Aram Hong said the detail mattered: “If this was really a fraud case, they wouldn’t have worked that hard.”⁷

On November 10, 2009, the jury returned not-guilty verdicts on all counts after fewer than six hours of deliberations. Juror Serfaynes Timson told reporters there had been “reasonable doubt on every charge” and that while the defendants “may have misled investors,” the government had failed to prove their “intent to defraud.” Prosecutor Benton J. Campbell said the office was “disappointed by the outcome” but accepted the verdict. Butswinkas said he was “glad the jurors listened.”⁴⁸

The SEC Civil Settlement

The SEC had filed its civil fraud complaint the same day the indictment was unsealed, alleging violations of the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. That case survived the criminal acquittal.⁶

On February 13, 2012, the day a civil trial had been scheduled to begin, Cioffi and Tannin reached a settlement with the SEC. Judge Block approved it on June 18, 2012, and neither defendant admitted or denied the allegations.⁹¹⁰

Under the terms, Cioffi paid $700,000 in disgorgement and a $100,000 civil penalty and accepted a three-year bar from the securities industry. Tannin paid $200,000 in disgorgement and a $50,000 penalty with a two-year bar. Both were permanently enjoined from violating the negligence-based antifraud provision of the Securities Act.⁹¹¹

Why the Case Still Matters

The Cioffi-Tannin verdict was the first criminal outcome in a major prosecution tied to the financial crisis, and legal scholars point to it as a turning point in the Justice Department’s approach. After the acquittal, federal prosecutors showed what one Virginia Law Review analysis called “remarkable reluctance” to pursue criminal charges against Wall Street executives for crisis-related conduct.¹²

Enforcement shifted toward corporate fines and deferred prosecution agreements. Between 2008 and 2019, federal authorities collected hundreds of billions of dollars in penalties from financial institutions, yet no senior banker was convicted of a crime related to the crisis. Scholars have contrasted that record with the executive convictions that followed the savings-and-loan crisis of the 1980s and the corporate scandals of the early 2000s.¹³ The Cioffi trial illustrated the barrier that would recur in later investigations: the difficulty of proving criminal intent in cases built on complex financial instruments and ambiguous internal communications. As the jurors put it, the government “didn’t give us enough evidence to go on.”⁷

1
Observer. Ralph Cioffi After the Fall
2
U.S. Department of Justice. Press Release – June 19, 2008
3
Stanford Law School / FCIC. FCIC Final Report – Chapter 12
4
NPR. 2 Ex-Bear Stearns Hedge Fund Managers Acquitted
5
ABC News. Bear Stearns Managers Indicted
6
SEC. SEC Litigation Release No. 20625
7
NPR. Bear Stearns Prosecution Backfires
8
ABC News. Bear Stearns Execs Acquitted in NY Fraud Trial
9
SEC. SEC Litigation Release No. 22398
10
Bloomberg. Cioffi, Tannin Settlement With SEC Approved by U.S. Judge
11
New York Times DealBook. Bear Stearns Ex-Managers to Pay $1 Million to Settle SEC Case
12
Virginia Law Review. David Zaring – Enforcement Discretion at the SEC
13
Cambridge University Press. The Financial Crisis on Trial: What Went Wrong