More than 400 people have been arrested since March as part of a sweeping Justice Department crackdown on alleged mortgage fraud schemes.
The FBI said the schemes — 144 mortgage fraud cases, resulting in 406 arrests between March 1 and June 18 — caused $1 billion in mortgage losses and have contributed to the nation's housing crisis.
The arrests, dubbed operation "malicious mortgage," were announced Thursday along with the separate indictments of two Bear Stearns hedge fund managers on fraud, conspiracy and insider trading charges — the first executives to face charges related to the FBI's investigation of financial institutions involved in subprime lending.
The Bear Stearns investigation focused on the implosion of two hedge funds, which were heavily invested in subprime lending and debt obligations connected to risky subprime mortgages.
The funds were managed by Ralph Cioffi and Matthew Tannin, who were charged with eight counts of securities fraud, wire fraud and conspiracy to commit securities and wire fraud. Cioffi was also charged with insider trading for allegedly moving $2 million out of the funds when he knew they were not performing well.
The indictment alleges that the men encouraged investors to continue putting money into the funds despite knowing they were unstable. The funds' implosion cost investors an estimated $1.5 billion in a two-month period.
"Rather than disclosing the true state of the Funds to investors and lenders … Cioffi and Tannin agreed to make misrepresentations in the ultimately futile hope that the Funds' bleak prospects would change and that their incomes and reputations would remain intact," the indictment says.
Lawyers for the two men said they were innocent.
"We are shocked and disappointed that the government has seen fit to fix blame on these two decent men. The good news though is that there will be a trial, and we look forward to the day they will be vindicated," Ed Little, Cioffi's attorney, said.
Susan Brune, attorney for Tannin said in a statement, "Matt Tannin is innocent. He is being made a scapegoat for a widespread market crisis. He looks forward to his acquittal."
The indictment notes that at the end of March "Cioffi expressed to a Fund team member that "I'm sick to my stomach over our performance in March."
According to the indictment, on March 7 Cioffi told a Bear Stearns broker who had over 40 investors in the hedge funds that the markets represented "an awesome opportunity."
The indictment alleges that the two managers through March told investors they would be adding more of their own money to the funds. But, on March 23, 2007, Cioffi began to move $2 million of his $6 million invested in the fund into a separate Bear Stearns hedge fund called Structured Risk partners, the indictment claims.
The indictment alleges that Tannin sent an e-mail to another fund team member at the end of March that said, "[B]elieve it or not — I've been able to convince people to add more money."
By the end of March 2007 both funds were down over 3.7 percent, which prompted a major investment bank to begin withdrawing $57 million.
As the situation became worse on April 22, 2007 Tannin sent a e-mail to Cioffi noting, "the subprime market looks pretty damn ugly … I think we should close the funds now. The reason for this is that if [the CDO report] is correct then the entire subprime market is toast."
But, the indictment says, three days later Tannin told investors on a conference call, "we're very comfortable with exactly where we are … the structure of the Fund has performed exactly the way it was designed to perform."
The indictment further alleges that Cioffi failed to disclose to investors on the conference call that the investment bank had requested to withdraw their $57 million from the funds.
Little said in a statement, "The subprime crisis took everyone by surprise, including the Fed and Treasury, and dozens of the largest financial institutions have lost over $300 billion to date on the same investments. Ralph Cioffi's funds lost money in exactly the same way. Because his funds were the first to lose might make him an easy target but doesn't mean he did anything wrong. Indeed, Mr. Cioffi had no motive to do anything wrong. He did not and could not have profited by doing anything the government now claims he did."
Cioffi and Tannin have also been targeted in a civil lawsuit by Barclays Investment Bank, which was a major investor in the funds, for allegedly making false representations about the performance of the funds.
A lawsuit filed by the Massachusetts Secretary of State alleges Bear Stearns Asset Management inadequately managed investors' funds by devising a set of increasingly complex deals that they did not clear with top Bear Stearns directors. The fund crumbled as the subprime credit industry unraveled.