How the Bear Stearns Fraud Case Unfolded The FBI counts on e-mails to make the first Wall Street arrests related to the subprime mortgage fraud crisis. But critics wonder how strong the case really is and whether Bear Stearns' failure made it an easy target.
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How the Bear Stearns Fraud Case Unfolded

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How the Bear Stearns Fraud Case Unfolded

How the Bear Stearns Fraud Case Unfolded

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Two Bear Stearns hedge fund managers last week became the first Wall Street executives to face criminal charges in the subprime mortgage crisis. NPR's Dina Temple-Raston reports that emails at the center of the case may be less damning than prosecutors say.

DINA TEMPLE-RASTON: The media blitz around the Bear Stearns arrest was ferocious. Their perp walk was on all the cable news shows.

Unidentified Man: Two former managers for Bear Stearns face charges they duped their investors.

TEMPLE-RASTON: The arrest blanketed the air waves. The Justice Department held two press conferences about them - one in New York, and one in Washington. Officials read excerpts of emails cited in the indictment. They accused fund managers Ralph Cioffi and Matthew Tannin of fraud. In emails to each other, the two worried about the possible collapse of the subprime mortgage market, while at the same time, they assured investors all was well. Brad Simon is a former prosecutor at the US Attorney's Office in New York. Now he represents white-collar defendants.

Mr. BRAD SIMON (Attorney): As a defense attorney, I would look at these emails and try to persuade a jury that they don't show an intent to defraud. They show other things: panic, hand wringing - you know, what do we do know, as opposed to, oh, let's go out and deceive the investors.

TEMPLE-RASTON: NPR contacted half a dozen hedge fund managers to gauge whether the emails excerpted in the indictment went beyond the pale. They said internal emails are often emotional. One day, a hedge fund manager might think he's doomed - in one email, Tannin said the funds were toast - only to be buoyed by some unexpected opportunity the next. People close to the case say that when full emails come out, they will present a very different picture from the one the government has painted. Again, Brad Simon.

Mr. SIMON: If the government is cherry picking selected email, that's a powerful argument for the defense. Well, what - you know, what about these emails? How come these are not in the indictment? Well, if that's the case, then it could be a very different situation.

TEMPLE-RASTON: Former prosecutor and now defense attorney Michael Bochner(ph) agrees.

Mr. MICHAEL BOCHNER (Attorney): I think a careful review of the emails, and certainly in conversations I've had with defense council about the entirety of these emails and activity that's not reported in the indictment, leads me to believe that this case is not nearly as strong as the government would lead everyone to believe that it is.

TEMPLE-RASTON: The FBI has said it is investigating at least 19 major Wall Street firms involved in the subprime mortgage crises. Bochner says the fact that they stared with Bear Stearns isn't a surprise.

Mr. BOCHNER: Bear Stearns was essentially a safe bet.

TEMPLE-RASTON: Had they rolled out surprise indictments against some other Wall Street company now, it might well have resurrected fears that the mortgage crises was far from over. Bear Stearns is out of business.

Mr. BOCHNER: They seem like a fairly easy target, and there's not going to be a huge ripple effect on the market by looking at the activities of another firm like Bear Stearns. And it was, in a lot of ways, a safe - a fairly safe target.

TEMPLE-RASTON: NPR has learned from two sources close to the case that the fact that Bear Stearns no longer existed played a big part, though certainly not the only part, in prosecutors' decision to indict Cioffi and Tannin. The US Attorney's Office and FBI declined to comment on the case. Michael Bochner.

Mr. BOCHNER: Sometimes, this is on effort to rattle cages and get people to come in a corroborate the government's case, give them information about other types of matters. So I'm not so sure they necessarily brought their strongest case first.

TEMPLE-RASTON: All these emails and witnesses are trying to get to the bottom of one thing: Did Cioffi and Tannin intend to mislead investors? What would happen if Cioffi was just caught on the wrong side of a trade and panicked? Stanley Arkin is a prominent Wall Street attorney.

Mr. STANLEY ARKIN (Attorney): How do you punish bad judgment when it's not malignant intent? And I'm assuming that what happened - in some respects humanly - was that his judgment failed him. His fear of failure came over him, and probably greed as well.

TEMPLE-RASTON: A jury will have to decide whether that is criminal. Clearly, last week's arrests were meant to send a message. People on both sides of the case say there was intense pressure from Washington to have a high visibility Wall Street arrest coincide with a lower level mortgage fraud crackdown announcement last week. And it worked out that way. Hours after Cioffi and Tannin had their perp walk, the Justice Department announced that it had arrested 406 real estate professionals for mortgage fraud.

Dina Temple-Raston, NPR News.

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