'The entire sub-prime market is toast,' read an e-mail between Ralph Tannin and Matthew Cioffi, two former Bear Stearns hedge fund managers who stand accused of having known their portfolios were in trouble, but lied to investors about it. The managers were arrested and indicted on conspiracy and securities fraud charges last week following a federal criminal probe into the collapse of two funds they oversaw.

According to the indictment, the fund managers lied about the funds' prospects despite concerns over liquidity and the outlook for the market. In an email on April 22 included in the indictment, Tannin warned Cioffi the sub-prime market could be 'toast', while both men were touting their funds as an 'awesome opportunity' for investors.

Hedge funds as an industry are set to bear the brunt of the reaction to the evidence coming into the public domain. Expect to see lengthy reports about the lack of transparency offered by hedge funds and how the sub-prime mortgage crisis has caused this loosely regulated industry heavy losses and a slew of redemptions.

Expect additional pressure from regulators and politicians on codes of conduct for hedge funds and more criticism on managers and the way they conduct their operations. Expect fund managers themselves to be very, very careful on what they say or write in the future.

But the problem, in the end, was due to the fact that Tannin and Cioffi appear to have started acting less like hedge fund managers and more like silver-tongued salesmen. And for that they are likely to pay.


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