Federal Criminal Defense Blog : Georgia Federal Criminal Defense Lawyer & Attorney : Gillen Withers & Lake Law Firm : White Collar Crime, RICO, Trial : Atlanta, Savannah, GA

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 Buxton had stated in a pre-trial interview with the government, in regard to the allegation that Cioffi had withdrawn $2 million of his own money from the hedge fund, that it was like “the captain beating the women and children off the boat.”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.

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The trial of Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin got underway last week. As reported by attorney Jacob Zamansky in Forbes and the New York Daily News, the parties gave opening statements on Thursday. Assistant U.S. Attorney Patrick Sinclair argued that Bear Stearns financial officer Matthew Tannin allegedly told investors on 11 occasions that he was putting more of his own money into Bear Stearns’ troubled High-Grade Structured Credit Strategies Fund and High-Grade Structured Credit Enhanced Leveraged Fund. Tannin allegedly told investors that it would be “silly” to redeem their investments. Sinclair also told the jury that Cioffi failed to disclose to investors that he had transferred $2 million of his own money to another Bear Stearns fund. The prosecution cited alleged incriminating e-mails between Cioffi and Tannin in which the defendants allegedly acknowledged that the subprime mortgage market was “toast” and that they should “close the fund.” Sinclair argued that Cioffi’s and Tannin’s actions were allegedly to save their bonuses and reputations. He spoke to the jury for about 45 minutes.
 

In contrast, Cioffi’s attorney, Dane Butswinkas, delivered a two hour opening statement using charts and exhibits to show the complexity of Bear Stearns’ management structure, hedge funds and the operation of the collateralized debt obligation (CDO) market. Butswinkas argued that the defendants were the victims of market forces beyond their control and that the defendants did their best to predict the future performance of the market and the funds. Tannin’s counsel, Susan Brune, also spent approximately two hours explaining to the jury about hedge funds, CDOs and market risk. Brune attributed the failure of the funds on a “run on the bank” and argued that the funds’ investors were well aware of the risks. Brune characterized the prosecution’s theory as “I lost my money, therefore there has to be a fraud.” The defense argued that the e-mails were taken out of context, and that worrying about markets is not a crime.
 

Nearly 300 investors kept their investments in the hedge funds, which lost $1.4 billion in July of 2007. The two hedge funds had experienced positive growth until the preceding quarter, however an internal Bear Stearns report showed that securitized subprime mortgages were losing value fast.
 

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The trial of former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin begins today in Brooklyn, as reported by Bloomberg. A jury will be selected today. 

Cioffi and Tannin are charged with allegedly causing losses of $1.4 billion to investors by misleading investors regarding the health of two Bear Stearns hedge funds, the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd. ("Enhanced Fund"). and the Bear Stearns High- Grade Structured Credit Strategies Master Fund Ltd. ("Master Fund"). Cioffi was a hedge fund manager and Tannin was an attorney who served as chief operating officer. They are charged with alleged conspiracy, securities fraud and wire fraud. Cioffi is also charged with alleged insider trading.

Cioffi's and Tannin's attorneys have argued that the collapse of Bear Stearns was actually the result of the failure of two other Bear Stearns hedge funds a year prior to the failure of the Enhanced Fund and the Master Fund.

U.S. Attorney Benton Campbell, a former member of the Justice Department’s Enron Corp. Task Force, and Assistant U.S. Attorney James McGovern, are leading the prosecution of Cioffi and Tannin. The prosecution alleges that Cioffi and Tannin were promoting the funds to investors while knowing that the health of the funds was in serious risk. The government has listed 38 witnesses and 532 exhibits which it intends to present at trial, however, the centerpiece of the government's evidence is expected to be Cioffi's and Tannin's own words in e-mails.Cioffi allegedly sent one e-mail on March 15, 2007, with the subject-line "Fear," stating that he was fearful of what the markets were going to do. In another e-mail, Tannin allegedly stated that if AAA bonds were downgraded, there would be no way for the funds to make money. Google released additional private e-mails to the government last week. Prosecutors allege that e-mails show Cioffi and Tannin allegedly boasting of how they were luring investors to invest more money in the funds at the same time they knew that the funds were in trouble. Witnesses for the government are expected to include Bear Stearns employees and investors in the hedge funds.

Cioffi is defended by attorney Brendan Sullivan, who won reversal of the charges against Alaska Senator Ted Stevens, as well as Margaret Keeley and Dane Butswinkas, all of Williams & Connolly LLP. Tannin is being represented by Susan Brune and Nina Beattie of Brune & Richard LLP. Commentators have observed that the e-mails by Cioffi and Tannin can be read in "many" ways.

A year following the failure of the funds, Bear Stearns itself failed and was purchased by JP Morgan Chase & Co. The failure of Bear Stearns was accompanied by failures of Lehman Brothers Holdings, Inc., and AIG. Losses from U.S. banks and mortgage companies in the financial collapse total at least $396 billion.

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As reported by Chris Herring over at the Wall Street Journal Law Blog, the trial of former Bear Stearns hedge fund managers Matthew Tannin and Ralph Cioffi is scheduled to commence next Monday. And now the government has obtained Tannin's e-mails from his private Google account. Tannin had closed the Google account on the advice of his counsel. Prosecutors suspected that Tannin was hiding something. Google released the e-mails a few days ago. U.S. District Judge Frederic Block for the U.S. District Court for the Eastern District of New York has ruled that since the e-mails have been released, the government cannot explore whether Tannin was trying to hide anything from investors in his personal e-mails, stating that it would confuse the jury and citing the fact that the government already intends to present 38 witnesses and over 500 exhibits in its case against the defendants.

E-mails between Tannin and Cioffi allegedly expressing concern over the health of the hedge funds have already been released to the public. The newly-produced e-mails are expected to reflect similar alleged concerns by the defendants.

As reported by CNN, Cioffi and Tannin are the only two persons to face criminal charges resulting from the worst financial crisis in U.S. history since the Great Depression. The defendants are alleged to have misled investors in two of Bear Stearns' hedge funds to believe that the condition of the funds was better than it in fact was. The hedge funds collapsed in the Spring of 2008, resulting in over $1 billion in losses to investors.

Legal observers have characterized Cioffi's and Tannin's prosecution as a "test case" and have cited the government's need to make an example to discourage similar conduct in the financial sector. Although Cioffi and Tannin may have offered the government what it believed to be its most clear cut case, commentators have noted it may be difficult to prove that Cioffi and Tannin possessed an alleged intent to defraud investors rather than merely being misguided or stupid, given the fact that very few foresaw the subprime mortgage crisis and the collapse of the market.

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As is well known, Bear Stearns, one of the largest investment banks in the world, was sold to JP Morgan Chase and effectively ceased to exist in March of 2008, after two Bear Stearns hedge funds invested in collateralized debt obligations—mainly subprime home loans—and once worth approximately $1.6 billion, lost nearly all of their value. The collapse of Bear Stearns was the harbinger for a succession of massive failures of financial institutions, including Lehman Brothers, Merrill Lynch and AIG, triggering the current global recession.

As reported by New York Magazine, Reuters and the Daily Telegraph, two managers of the hedge funds, Ralph Cioffi and Matthew Tannin were charged in June in the Eastern District of New York with several counts of wire and securities fraud for allegedly misleading investors regarding the status of the funds in the Spring of 2007. Cioffi, a hedge fund manager, and Tannin, the Chief Operating Officer of Bear Stearns Asset Management (BSAM), have pled not guilty. The collapse in value of the funds cost investors approximately $1.4 billion. When traders wanted to sell some of the funds’ subprime mortgages, no one wanted to buy them.

The trial of Cioffi and Tannin is set to begin in October. The evidence against Cioffi and Tannin consists largely of e-mails between them and investors describing the funds as “an awesome opportunity,” despite allegedly knowing that the funds had problems. Bear Stearns investors are expected to testify at the trial. Both men have consistently maintained their innocence. They face a potential 20 years in prison if convicted.

Cioffi is also charged with alleged insider trading for withdrawing $2 million of his own money from the funds. The government alleges that he engaged in hundreds of transactions involving the funds without the necessary approval by the fund’s directors and despite being warned about conflicts of interest. All trades between Bear Stearns, a securities firm, and BSAM, an asset management firm, were supposed to be vetted by an independent committee. In the Fall of 2006, Bear Stearns ordered a moratorium on such internal trades by Cioffi. Prosecutors sought to introduce evidence of Cioffi’s alleged insider trading in order to demonstrate how Cioffi allegedly operated.

British bank Barclays, a shareholder of one of the funds, also filed suit against Cioffi and Tannin for alleged fraud, however, the suit has been withdrawn.

The prosecution of Cioffi and Tannin makes conspicuously noticeable the fact that no senior executives from Bear, Lehman Brothers, AIG, etc., have been charged with any wrongdoing in the fallout from the financial crisis.

 

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