US law firm expects more investor claims (Bear Stearns)

June 24, 2008
HEDGEWEEK

New York law firm Klayman & Toskes believes that claims against Bear Stearns – now part of JP Morgan Chase – on behalf of investors in its High-Grade Structured Credit Strategies and High-Grade Structured Credit Strategies Enhanced Leverage funds are likely to increase following the criminal indictment last week of the former managers of the funds, Ralph Cioffi and Matthew Tannin.

Last Thursday Cioffi and Tannin were taken into custody and charged by prosecutors with securities fraud, conspiracy and wire fraud, alleging that they had lied to investors about the collapse of the sub-prime mortgage market.

In an April 2007 e-mail from to Cioffi quoted in the indictment, Tannin said: ‘The subprime market looks pretty damn ugly.’ Based upon internal Bear Stearns reports observed by Tannin, he proposed: ‘I think we should close the funds now,’ noting that ‘the entire subprime market is toast’.

The prosecutors claim, however, that Tannin failed to convey this material information to investors in the High-Grade Structured Credit Strategies funds, while Cioffi pulled USD2m of his own money out of the fund at the same time that we was expressing optimism to investors about the future performance of the funds. In connection with this redemption, Cioffi has been separately charged with insider trading.

A separate complaint filed by the US Securities and Exchange Commission in Brooklyn federal court alleges that during the first five months of 2007, Cioffi and Tannin ‘deceived their own investors, as well as the funds’ institutional counterparts, by fraudulently concealing from them the full extent of the fund’ deepening troubles.’

The SEC also noted: ‘Cioffi’s clandestine redemption caused the Enhanced Leverage Fund to pay out USD2m at a time when the markets were weak and the fund was facing another month of losses, as well as escalating margin calls and forced sales.’

‘While Cioffi and Tannin are the first Wall Street executives to be charged in connection with the subprime crisis, they most likely will not be the last,’ says Steven D. Toskes, a partner at Klayman & Toskes.

‘The criminal counts contained in the federal prosecutors’ indictment simply confirm what we have been hearing from investors who believed that Bear Stearns made misrepresentations and engaged in fraudulent conduct in connection with the funds.

The law firm, which specialises in representing investors throughout the world in securities arbitration and litigation cases against Wall Street brokerage firms, expects filings against Bear Stearns on behalf of institutions, hedge funds and funds of funds will increase in the coming weeks given the amount of inquiries and in light of the charges.

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