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Former Bear Stearns hedge fund managers acquitted

November 11, 2009|E. Scott Reckard

The speedy acquittal of two former Wall Street fund managers in the only major criminal case to emerge from the mortgage meltdown and financial crisis is a major blow to federal prosecutors and a setback for the use of e-mail evidence, legal experts say.

Ralph Cioffi and Matthew Tannin, who managed two failed mortgage-bond hedge funds at now-defunct Bear Stearns Cos., were found not guilty Tuesday of securities fraud. Cioffi was acquitted of insider trading as well.

Prosecutors had accused the pair of misleading investors about the burgeoning troubles at the funds as the first wave of subprime mortgage defaults set in. The funds' failure in July 2007 cost investors $1.4 billion and helped spark the demise of Bear Stearns, which was absorbed by JPMorgan Chase & Co. in a fire-sale takeover.

A federal jury in New York deliberated for about nine hours over the course of two days -- a lightning-fast verdict for a complex white-collar case.

"This is a total rebuff to the prosecution," said John C. Coffee, a Columbia Law School professor.

At the heart of the case were the defendants' e-mails, including one in which Tannin said the subprime market "looks pretty damn ugly." Tannin also said, "There is simply no way for us to make money -- ever."

Two days after the e-mail, the men told their bosses they were confident about the health of the funds, according to government court filings. And in a call with investors a day after that, Tannin said "there's no basis for thinking this is one big disaster."

But jurors said the evidence wasn't strong enough.

Juror Aram Hong, a restaurant beverage manager, said the e-mails showed Cioffi and Tannin were working "24/7" to save the funds in the months before they collapsed.

"Just because you're the captain of a ship and it gets hit doesn't mean you should be blamed," Hong said.

Benton J. Campbell, the U.S. attorney in Brooklyn, whose office tried the case, said he was disappointed, "but the jurors have spoken, and we accept their verdict."

A spokesman for Campbell said one count of wire fraud, dismissed because it was found to have occurred in Manhattan, might still be prosecuted by federal authorities there.

"At this point the decision has not been made," he said. The Securities and Exchange Commission said the agency's civil fraud lawsuit against Cioffi and Tannin would continue.

Cioffi, 53, couldn't be reached for comment. In a statement, Tannin, 48, thanked jurors "for their commitment to finding the truth."

Using defendants' own e-mailed words as evidence has won convictions in the last decade of such prominent corporate defendants as Martha Stewart and Dennis Kozlowski, the former chief executive of Tyco International.

But Columbia's Coffee said e-mails on their own are typically too open to interpretation to be strong evidence. What's needed, he said, is old-fashioned corroboration such as cooperating witnesses or wiretaps.

"The key factor is the quality of the evidence," Coffee said.

John Hueston, who led the federal prosecution of executives at defunct energy trading giant Enron Corp., said the widespread use of e-mail, text messages, Twitter and other social media has caused the public to perceive electronic messages as casual remarks open to interpretation.

"The landscape has changed," said Hueston, now a defense lawyer with Irell & Manella in Newport Beach. "More sophisticated jurors may realize that a random e-mail may not capture a fund manager's ongoing frame of mind."

A central figure in the mortgage meltdown, former Countrywide Financial Corp. Chairman Angelo R. Mozilo, faces an SEC civil lawsuit accusing him of defrauding investors. Key evidence in that suit consists of e-mails in which Mozilo denounced certain home-loan products as "toxic" and "poison."

Hueston wouldn't talk about the case against Mozilo because other lawyers at Irell & Manella are representing him. Those lawyers couldn't be reached for comment.

But Walter Brown, an attorney for Mozilo's co-defendant, former Countrywide President David Sambol, said, "The verdict demonstrates how allegations by the government are simply that, and should not be taken at face value.

"Until you hear the entire context it is premature and dangerous to draw conclusions from selectively quoted snippets of e-mails," said Brown, a partner at Orrick, Herrington & Sutcliffe in San Francisco.


Bloomberg News was used in compiling this report.

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