By Peter Lattman
The Securities and Exchange Commission has reached a settlement with two former Bear Stearns hedge fund managers that will avert a second trial over accusations that they had misled investors as the mortgage market was crumbling.
The deal, which is subject to court approval, could be announced on Monday, said two people with direct knowledge of the matter, who requested anonymity because they were not authorized to discuss it publicly.
A trial was set to begin on Monday in Federal District Court in Brooklyn. The former Bear executives, Ralph R. Cioffi and Matthew M. Tannin, were accused of lying to investors about the health of their hedge funds, which were laden with complex securities backed by subprime mortgages.
The settlement comes just as federal authorities have publicly vowed to redouble their efforts to hold Wall Street executives responsible for questionable conduct during the housing boom.
A civil trial would have been the second trial against the former Bear executives. The Justice Department and the S.E.C. brought parallel criminal and civil charges against Mr. Cioffi and Mr. Tannin in 2008.
The criminal case was viewed as an early test of the government’s ability to win convictions tied to the subprime mortgage-related investments that banks sold during the housing boom.
When a jury acquitted both men in November 2009, the loss was seen as a major setback for the the Justice Department. The not-guilty verdict demonstrated that it would be challenging to build successful cases against Wall Street executives at the center of the financial crisis.
Battered by criticism that it had been an ineffective regulator before the financial crisis, the S.E.C. maintained that it would continue to pursue its case. But some legal specialists questioned whether it made any sense for the commission to take the lawsuit to trial.
“The government clearly had the power to do this, but the more salient question is whether this was the best use of their resources,” said Daniel L. Zelenko, a partner at Crowell & Moring and a former S.E.C. lawyer. “More than two years after a jury has already acquitted on substantially the same set of facts, it’s not clear that it was.”
Bear’s hedge funds were among the first prominent collapses related to the bursting of the housing bubble. When the mortgage market first became unglued in 2007, the two investment vehicles failed and investors lost $1.8 billion. The demise of the funds heralded the coming calamity on Wall Street.
Lawyers for Mr. Cioffi and Mr. Tannin declined to comment, as did an S.E.C. spokesman.