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Charges laid in relation to US subprime colla -

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Charges laid in relation to US subprime collapse

The World Today - Friday, 20 June , 2008 12:14:00

Reporter: Peter Ryan

ELEANOR HALL: To the United States now, where the first criminal charges have been laid in relation
to the subprime mortgage crisis.

Two former managers from the Bear Stearns investment bank are the first executives to face criminal
charges but more charges are expected on Wall Street in a matter of days.

Already, the FBI has arrested more than 400 property market players, including estate agents and
loan originators who advised homebuyers on what turned out to be risky loans.

Business editor Peter Ryan has the story.

PETER RYAN: For the past 18 months, the subprime mortgage meltdown has wreaked economic havoc
across the United States and around the world.

It sparked America's worst housing slump since the Great Depression, wiping out $3 trillion in home
equity, and the world's top investment banks have posted around $250 billion in subprime related
write-downs.

With global financial markets still reeling from the resulting credit crisis, the US Justice
Department been digging through the subprime ashes.

TV NEWS REPORTER: Operation Malicious Mortgage: hundreds rounded up in a US crackdown on fraud.

PETER RYAN: Around 400 people, including real estate agents and lawyers, have been charged with
mortgage fraud for misleading clients about the terms of their loans. But they're just the small
fish in what's become a nationwide hunt.

Two former hedge fund managers from the investment bank Bear Stearns, which almost collapsed
earlier this year, are the first Wall Street high flyers to be charged in relation to the subprime
crisis.

Ralph Cioffi and Matthew Tannin surrendered themselves to the FBI, and face conspiracy, wire fraud
and securities fraud charges for misleading investors about the state of two subprime exposed
funds; the High Grade Fund and the Enhanced Fund.

BENTON CAMPBELL: The defendants knew by March 2007 that both funds were in grave condition and at
risk of collapse. The defendants' internal discussions made plain that they viewed the funds'
situation as perilous.

PETER RYAN: US Attorney Benton Campbell said at one point the pair privately charged glasses in a
vodka toast to celebrate the survival of the teetering funds.

BENTON CAMPBELL: Rather than disclosing the true state of the funds to investors and lenders,
however, the defendants lied about the funds' condition, including their prospects, liquidity and
exposure to the subprime market. They lied in a futile hope that the funds would turn around and
that their incomes and reputations would remain intact. By June 2007 however, the funds collapsed,
and investors were told they could no longer redeem their investments.

PETER RYAN: Benton Campbell also alleges the two fund managers lied about their personal stake in
the funds, what's known in the business as having "skin in the game."

BENTON CAMPBELL: Namely, whether they had personally invested their own money in the funds, how
large those investments were and whether they had withdrawn money from or failed contribute money
to the funds.

In the hedge fund world, "skin in the game" is vitally important to investors because it shows the
manager's faith in the funds, and aligns investor's interests with those who manage those funds.

PETER RYAN: One of the fund managers, Ralph Cioffi, left Bear Stearns last year amid claims that he
withdrew $2 million from the two funds before they collapsed in July.

He's been released on bail of $4 million, given an additional charge of insider trading, while his
former colleague, Matthew Tannin, posted a bond of $1.5 million.

Both have pleaded not guilty.

SCOTT MEYERS: Good lawyers can make complicated cases easy and that's what the government's going
to try to do here, explain to the jury that this is a very simple case about fraud.

PETER RYAN: Scott Meyers is a litigation specialist with the Chicago law firm Levenfeld Pearlstein.

SCOTT MEYERS: The defence is going to argue that these were remarkably complicated instruments
involving exotic products and very turbulent markets and these people were doing the best they
could trying to manage the uncertainty.

The jury will obviously have to decide which of those two inferences is more reasonable.

PETER RYAN: But there are also claims that US financial regulators were asleep at the wheel as the
subprime crisis unfolded, prompting some tough talk from the US Treasury Secretary, Hank Paulson.

HANK PAULSON: We should quickly consider how to most appropriately give the Federal Reserve the
authority to access necessary information from complex financial institutions and the authority to
act, to mitigate systemic risk, in advance of a crisis.

PETER RYAN: Still, US Attorney Benton Campbell made it clear that Ralph Cioffi and Matthew Tannin
are just two people involved fraud on Wall Street.

BENTON CAMPBELL: The inditement is not a wedge, and the government does not contend that these
defendants are responsible for the collapse of Bear Stearns.

PETER RYAN: But FBI Director Robert Mueller made it clear that today's arrests could just be the
start.

ROBERT MUELLER: To persons who would, are involved in such schemes, we will find you, you will be
investigated and you will be prosecuted.

To those who would contemplate misleading, engaging in such schemes, you will spend time in jail.

PETER RYAN: Today's charges are certain to result in a series of long and costly legal battles,
with Ralph Cioffi and Matthew Tannin facing 20 years in prison if convicted.

ELEANOR HALL: Business editor Peter Ryan.