More than 400 defendants have been charged with mortgage fraud, investor fraud or foreclosure fraud since March, the government announced today. But the spotlight was on two former hedge fund managers who allegedly cost investors $1.8 billion in losses on mortgage securities.
Operation Malicious Mortgage was jointly announced by the Federal Bureau of Investigation and the U.S. Department of Justice.
From March 1 through yesterday, 406 defendants were charged in 144 mortgage fraud cases, the announcement said. Just yesterday, 60 arrests were made in 15 districts.
Losses from the 144 cases were estimated at around $1 billion.
In addition to mortgage fraud, the operation targeted investor fraud, foreclosure rescue scams and mortgage-related bankruptcy schemes that postpone foreclosure.
Ralph Cioffi and Mathew Tannin were indicted by the Justice Department and arrested today in connection with investor fraud related to mortgages.
Cioffi was senior portfolio manager and Tannin was portfolio manager and chief operating officer of Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd. and Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd., two highly leveraged subprime hedge funds that collapsed last year.
A complaint filed by the Securities and Exchange Commission in the U.S. District Court for the Eastern District of New York alleges the value of the funds’ portfolio of subprime residential mortgage-backed securities began falling at an increasing pace during the first five months of last year. At the same time, redemptions and margin calls were escalating.
Although the two knew the funds were in grave condition by March 2007, they lied to investors in an effort to stem withdrawals and keep new money coming in, the government alleges.
An April 2007 monthly performance that projected flat returns based on just a subset of the funds’ portfolios was cited by the securities regulator. But actual results released just a few weeks later revealed April losses of more than 5 percent on one fund and losses of nearly 19 percent on the other.
The SEC also cited monthly written performance summaries that said direct subprime exposure was typically around 7 percent. But after the collapse, the sales force of one of the funds was allegedly told subprime exposure was actually around 60 percent.
Meanwhile, Tannin told investors he was increasing his personal investments in the funds even though he never actually did so, the SEC alleges. Cioffi redeemed $2 million from the funds — more than one-third of his personal investments — while boasting about his personal stake to investors.
Around $1.8 billion in estimated losses resulted from the collapse of the funds.
“Hedge fund managers cannot lie to their own investors as alleged here, simply because those investors happen to be more sophisticated than the general public,” SEC Associate Director Antonia Chion said in the press release. “Particularly in times of poor performance or market difficulty, even sophisticated investors look to fund managers to speak truthfully to them.”
Other government agencies to participate in Operation Malicious Mortgage included the U.S. Postal Inspection Service, Internal Revenue Service, U.S. Immigration and Customs Enforcement, U.S. Secret Service, U.S. Trustee Program, Department of Housing and Urban Development, Department of Veterans Affairs and Federal Deposit Insurance Corporation.
“Operation Malicious Mortgage is the most recent coordinated sweep in an ongoing law enforcement effort to combat mortgage fraud, which also included Operation Continued Action in 2004 and Operation Quick Flip in 2005,” the statement said.
Securities and Exchange Commission v. Ralph R. Cioffi and Matthew M. Tannin
Civil Action No. 08 2457 (FB) (E.D.N.Y. June 19, 2008)
