By Frank James
So how badly did federal prosecutors blow it in the case in which a jury acquitted two former hedge fund managers of subprime mortgage-related fraud?
The jury found the prosecutors' case so weak apparently that one juror said she'd invest with Ralph Cioffi and Matthew Tannin, the two men on trial.
An excerpt from a Bloomberg story:
Aram Hong, a juror from Woodside, Queens, said the exchanges between Cioffi and Tannin shown to the jury proved to her that the two men were working "24-7" to save the funds in the months before they collapsed. She noted a defense exhibit that showed the fund managers were working at 4 a.m.
"If this was really a fraud case, they wouldn't have worked that hard," said Hong, 27, a food and beverage director at the Iroquois Hotel in midtown Manhattan, adding that she would invest with the two men if she had the money.
Hong said another e-mail showed the defendants looking at all the components of the market, not just the negative. She said they "took the time to compare and consider all elements."
Cioffi and Tannin managed two funds at Bear Stearns. The funds got into trouble when the subprime mortgage crisis began to gain momentum in the summer of 2007 after strapped homeowners, many of whom should have never qualified for mortgages, encountered difficulties paying mortgage loans that were resetting at higher rates.
As a result of the subprime market collapse, the funds Cioffi and Tannin managed lost their value. Federal prosecutors later charged the two men with fraudulently soliciting new investors to the funds even as the funds were losing money.
The collapse of the funds was viewed by many as a bellwether of Bear Stearn's own collapse in 2008 which led to its eventual Federal Reserve arranged sale to JP Morgan Chase.
But jurors didn't buy the prosecutors' narrative of how events played out.
Another Bloomberg excerpt:
(Juror Serphaine) Stimpson said she came into the trial thinking both Cioffi and Tannin were guilty of the fraud, insider-trading and conspiracy charges. She said she began to have second thoughts as the testimony progressed and defense lawyers "tore the government witnesses apart."
"We just weren't 100 percent convinced," said Stimpson, 27, an office coordinator at Brooklyn College. "As the witnesses began to testify, I had my doubts."
Key parts of the government's case relied on e-mails written by the defendants.
The men claimed in e-mails and conversations with investors to be adding their own money to the funds in the months before their collapse, the U.S. alleged. Neither man added any money to the funds, once valued at $20 billion, prosecutors said.
The defense argued Cioffi and Tannin were innocent of any wrongdoing and had remained honestly optimistic about the funds' health. E-mails which the men sent were more ambiguous than the government alleged, the lawyers for the two men said.
Jenny McCaughey, of Deer Park, on New York's Long Island, served as the jury forewoman. She said the e-mails presented by the government as evidence cut both ways.
"They said one thing and another thing," McCaughey said. "The government didn't give us enough evidence to go on."
But while prosecutors failed this time, that doesn't mean their targets are out of the legal woods. Just ask Richard Scrushy or Dennis Kozlowski.
Scrushy, once the head of HealthSouth, was acquitted of federal fraud charges but later convicted of federal bribery charges and is serving a sentence of more than six years in a federal prison in Texas.
In New York state court, Dennis Kozlowski of Tyco went free initially after a mistrial but was eventually convicted of fraud charges and is serving time in a state prison.
Meanwhile, three former brokers and three former executives of a brokerage firm were convicted in April 2009 of conspiracy in an illegal trading scheme after being acquitted of slightly different charges earlier.