Prosecution of Bear Stearns Hedge Fund Managers Cioffi and Tannin Runs into Setbacks; Prosecution Seeks to Present Evidence of Uncharged Offenses
The trial of Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin continues in the Eastern District of New York. The Court has heard five days of testimony from government witnesses and admitted voluminous documents, mostly e-mail messages, as reported by Dan Slater of the New York Times.
However, the case does not appear to be going as the government had envisioned, with its own witnesses failing to support the allegations in the government's indictment. Even presiding U.S. District Judge Frederic Block has appeared irritated with the prosecution, at one point commenting on the prosecution's introduction of so many documents.
Observers have noted that the government's alleged case against Cioffi and Tannin is built upon e-mails whose meaning often changes when placed in their surrounding context. For instance, the prosecution has introduced an alleged incriminating e-mail--and one which it has highly touted--an April 22, 2007, e-mail from Tannin to Cioffi in which Tannin allegedly stated that “the whole subprime market is toast.” However, as reported by the Times, Tannin also stated in the same e-mail:
Every so often I worry a bit that because you have been so spectacularly successful so far in almost every way, you might be taking this opportunity to second guess yourself. Well, just in case you are, don’t. At the end of the day, I think we will both be able to look at all that happened and all that we have done and learn from what has gone well as well as from what hasn’t … What a shame it would be for us to not take all we have learned and apply it going forward.
Tannin continued:
We have lived a full and exciting life in the midst of an increasing [net asset value] and I see no reason why the fullness and positive excitement we experience should be any different if the trajectory of NAV changes. On every level I did not think a mature person or any person who is at peace with themselves would allow NAV to be the determining factor in anything except their W2 calculation, and Turbo Tax seems to do that effortlessly.
Former Bear Stearns private client representative/broker George Buxton also testified for the government. Buxton had stated in a pre-trial interview with the government, in regard to the allegation that Cioffi had withdrawn $2 million of his own money from the hedge fund, that it was like “the captain beating the women and children off the boat.” However, while testifying on cross-examination last week, Buxton stated that he had been unaware that Cioffi had reinvested the withdrawn funds in another Bear Stearns fund and admitted that if he had been aware of this fact, he would not have made the "boat" comment. Furthermore, when prosecutor Ilene Jaroslaw asked Buxton whether portfolio managers who intentionally give investors false and misleading information were guilty of a crime, Judge Block sustained an objection by the defense and gave the prosecution a stern warning.
Finally, additional evidence that the prosecution may be having a more difficult road than expected comes in the form of a letter request by the prosecution to Judge Block to introduce evidence of alleged uncharged acts by Cioffi and Tannin, filed on Sunday. The letter takes issue with Cioffi's and Tannin's counsels' arguments in opening statements to the jury to the effect that it was implausible that Cioffi and Tannin suddenly "went criminal" after the hedge funds had experienced months of positive growth and one flat month. In response, the prosecution seeks to introduce alleged evidence that Cioffi and Tannin allegedly defrauded Busey Bank several months earlier, in December 2006. The government contends that Cioffi allegedly executed a pledge agreement with Tannin's signature in which Cioffi and Tannin allegedly falsely represented to the Bank that the Bear Stearns Asset Management (“BSAM”) had consented to Cioffi’s pledge of his entire investment in the Enhanced Fund, when in fact BSAM had allegedly not consented. The government seeks to present the testimony of Greg Quental, former Bear Stearns Global Head of
Hedge Funds and one of the highest ranking Bear Stearns executives apart from CEO Rich Marin, to show that BSAM allegedly did not consent, but that Cioffi and Tannin allegedly pledged Cioffi's investment anyway to obtain a $4.25 million line of credit.
