Former Bear Stearns hedge fund manager Ralph Cioffi enters Brooklyn federal court this month in New York. Cioffi and ex-manager Matthew Tannin are accused of conspiracy and securities and wire fraud in the wake of Bear Stearns' collapse.
Former Bear Stearns hedge fund manager Ralph Cioffi enters Brooklyn federal court this month in New York. Cioffi and ex-manager Matthew Tannin are accused of conspiracy and securities and wire fraud in the wake of Bear Stearns' collapse. Louis Lanzano/AP
The financial crisis spawned countless civil suits, but setting aside Bernard Madoff, who pleaded guilty, only two investment professionals have faced criminal charges.
Ralph Cioffi and Matthew Tannin worked at the now-defunct Bear Stearns and are accused of lying to investors before their multibillion-dollar hedge funds collapsed in 2007.
Federal prosecutors are using selected quotes from e-mails written by the two men to make their case. For example, Tannin wrote: "My goal is to convey my thoughts to investors. They should ALL be adding to their position. I am. It is the perfect time." The funds collapsed four months later, and Tannin never added his own money to the funds.
The e-mails are strong evidence.
"E-mails are the greatest advance in law enforcement since fingerprints," said John Coffee, a law professor at Columbia University.
Multiple Charges Against The Pair
Prosecutors say Tannin and his colleague Cioffi committed securities fraud because they lied. They committed wire fraud because they told their lies in e-mail messages. And they committed conspiracy because they lied together. Cioffi faces an additional charge of insider trading, because the government says he withdrew $2 million of his own money from the funds, knowing the funds were in poor shape.
The defense says that money went right back into another Bear Stearns hedge fund, and that the e-mails are being taken out of context.
"Defense counsel is focused on making the case look complex, raising all kinds of peripheral and subsidiary questions," Coffee said, "just in the hopes that one jury will say, 'I have a reasonable doubt.' "
Defense Says Others Share Blame
So far, the defense has pointed out that many more people in the company were looking at the funds. There were people responsible for monitoring risk and liquidity for the funds, people who marketed the funds, people who ensured that trades were executed at the right times.
The defense says the funds were "under a microscope at every level," and that all of those people were doing the best job they could.
Coffee said if there's a conviction in this case, federal prosecutors may go after others.
"There are other candidates," he said. "There are people at Lehman who may have made misrepresentations to institutional investors. I also think there are possibilities that people at credit rating agencies, at investment banks that took public securitized offerings of debt, might be indicted on the grounds they hid facts."
If the jury doesn't convict the men, Coffee says the government may move more cautiously in the future.
Worthy Of Criminal Prosecution?
Andrew Frisch, who served as a federal prosecutor for 11 years in the district where this case is being tried, now works on the other side, in white-collar criminal defense. Frisch doesn't deny that Cioffi and Tannin might have lied to investors, but he doesn't think their lies are worthy of criminal prosecution.
"Were these guys trying to swindle their investors?" Frisch asked. "Were these guys trying to take money out of the pockets of widows and orphans? No."
Frisch says Cioffi and Tannin were trying to figure out how bad the downturn was going to be, if there was in fact going to be a serious downturn, and what to do about it. He says they didn't want to say anything to cause a run on the bank, so to speak.
"If they mismanaged this crisis, even if it involved lying, God forbid, sue them," Frisch said. "Sue them for the losses. But making them into federal felons and putting them in jail for 20 years — I think it's wrong."
Cioffi and Tannin also face a number of civil suits, but they're the only ones at Bear Stearns facing criminal charges.