Former Bear Hedge Fund Managers Found Not Guilty of Subprime Fraud

Two former hedge-fund managers have been cleared of charges in the first major case of alleged fraud related to the financial crisis. A jury found that Ralph Cioffi and Matthew Tanin did not lie to investors who lost $1.6 billion in two funds made up of mostly of subprime mortgage-backed securities. The men were facing 20 years in prison if convicted on charges of conspiracy, securities fraud and wire fraud.

As the New York Times reported last week, the government's case hinged on statements made by the two men about the health of the funds:

The government relies heavily on a private e-mail message from Mr. Tannin to Mr. Cioffi in April 2007, in which he relies on a mortgage model prepared by another Bear Stearns colleague who was not charged in the case. In the message, Mr. Tannin said that if the model was correct, "the whole subprime market is toast" and they should close the funds immediately.

Three days earlier, on a conference call with the funds' investors, Mr. Cioffi and Mr. Tannin expressed confidence about the prospects of their investments and said they saw "opportunities" in the market. When an investor asked if any other investors were taking money out of the funds, Mr. Cioffi said there were only a "couple of million" in coming redemptions.

The government claims Mr. Cioffi lied at that point because he knew of a pending $57 million withdrawal that had been requested by a big investor, Concord Management.

Lawyers for the defendants argued that their clients were expressing "sincere optimism about the future of the funds" and that they failed because lenders stopped extending them credit.

As Bloomberg points out, the jury's verdict may make it harder for the Justice Department to prosecute other fraud cases related to the subprime mortgage crisis:

"Any time the government undertakes a major prosecution in a new area, the outcome certainly influences its thinking about the prosecutability of other potential defendants," said Jacob Frenkel, a former U.S. Securities and Exchange Commission lawyer now in private practice. "Acquittals force prosecutors to rethink their theories and charges."

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