White Collar and Securities: JPMorgan Closely Monitoring Cioffi and Tannin Trial

Months before Lehman Brothers collapsed, Bank of America acquired Merrill Lynch, and the securities markets came to the precipice of disintegration, JPMorgan Chase acquired Bear Stearns. The acquisition took place in March 2008 for $10 per share. As is common in acquisitions through stock purchases, JPMorgan also acquired Bear Stearns's potential liabilities including those arising from ongoing Bear litigation.

In 2007 two Bear Stearns hedge funds failed, resulting in a market meltdown that presaged the 2008 market panic. As a result of the failure of the Bear hedge funds, federal prosecutors sought and obtained the indictment of the heads of the two Bear funds, Ralph Cioffi and Matthew Tannin. The indictment charges Cioffi and Tannin with conspiracy, securities fraud, and wire fraud. Cioffi is also charged with insider trading.

The indictment alleges that Cioffi and Tannin were aware of the precarious financial condition of the Bear hedge funds and the grave risk of their collapse, but nevertheless, they failed to inform the funds' investors and the public of the true facts. Instead, the indictment alleges that they made false statements to lull investors into not withdrawing funds. The government alleges that investors lost more than $1 billion upon liquidation of the funds in July 2007 as a result of the fraud.

While JPMorgan is free from exposure in the criminal case, the evidence adduced at trial could have significant impact on civil suits against the firm. There are currently two significant cases that plaintiffs have filed against JPMorgan. In one suit investor Bruce Sherman has filed a claim against Bear (JPMorgan) alleging that Bear fraudulently overstated the value of the hedge funds' assets. This suits seeks unspecified damages, but success could result in plaintiffs recovering billions of dollars. The second suit, filed by Bank of America, seeks damages of $2 billion and alleges that the Bear hedge funds' managers deceived Bank of America about the financial condition of the hedge funds to sell the bank $4 billion of mortgage backed securities and to obtain from BofA a further $1 billion line of credit.

If evidence at the criminal trial of Cioffi and Tannin proves that executives above the hedge fund managers were aware of the true financial status of the funds, the likelihood of success in the civil suits will increase. Moreover, the more such evidence comes to light, the more likely that other plaintiffs will come forward and sue Bear (JPMorgan). In short, JPMorgan has a very keen interest in the evidence adduced in the trial.

For a further discussion of the issues confronting JPMorgan Chase in the Cioffi and Tannin trial, please see the following article in cnnmoney.com, http://money.cnn.com/2009/10/08/news/companies/bear_stearns_trial_jpmorgan.fortune/?postversion=2009100908