| NEW YORK
NEW YORK Two former Bear Stearns hedge fund managers were found not guilty of fraud, a decision that could make government prosecutors less likely to bring criminal charges against Wall Street executives for their role in the financial crisis.
The case -- the first major prosecution arising from the meltdown of major U.S. financial institutions -- was seen as a litmus test of whether a jury, presented with evidence from emails between money managers and conference calls with investors, would convict individuals for corporate collapses.
Ralph Cioffi, 53, and Matthew Tannin, 48, were acquitted of all charges on the second day of deliberations by a jury in U.S. District Court in Brooklyn, New York. Cioffi and Tannin left the courthouse with their smiling wives and relatives, some of them crying tears of relief.
Cioffi and Tannin managed two funds, crammed with subprime mortgage-backed securities, that lost institutional and individual investors a total of $1.6 billion when the funds collapsed in mid-2007 at an early phase of the Wall Street market meltdown.
The jury on Tuesday acquitted both men of conspiracy, securities fraud and wire fraud -- charges brought in a June 2008 indictment. Cioffi was acquitted of an additional charge of insider trading.
"There wasn't enough evidence ... The emails went both ways," jury forewoman Jenny McCaughey told reporters after the verdict. "They say one thing one time, another thing another time. We just didn't have enough to convict them."
Bear Stearns collapsed in March 2008, several months after the funds managed by the two men failed. It was sold to JPMorgan Chase & Co (JPM.N) in a government-brokered fire sale.
Cioffi, who worked for Bear Stearns for 25 years, and Tannin still face civil lawsuits, including one brought by Bank of America (BAC.N) over the bank's investment in their funds.
"The government clearly will need to rethink whether and when to assert criminal responsibility in connection with the financial meltdown," said Jacob Frenkel, former SEC enforcement lawyer and now a law firm partner.
During the trial, one wire fraud count was moved to the federal district of Manhattan, but it was not immediately clear whether that prosecution would go ahead.
In a telephone interview, Cioffi said civil proceedings remained and he declined to comment on the verdict other than to say he was happy with the outcome of the month-long trial.
"We're going home with the family for dinner, opening a bottle of wine and we're just going to relax," Cioffi said. "That's all we have planned for tonight."
The federal prosecutor whose office brought the case, three months after the government began a crackdown on mortgage fraud, said he was disappointed.
"Honesty and integrity are the principles upon which our financial markets function," Benton Campbell, the U.S. Attorney for the Eastern District of New York, said in a statement. "Enforcing and protecting those principles will continue to be one of the principal efforts of this office."
Juror Serphaine Stimpson, 27, an office coordinator at a Brooklyn college, called Cioffi and Tannin "scapegoats for Wall Street." She said: "All eyes were on the trial. It's Bear Stearns we're talking about."
Tannin left the courthouse smiling broadly with his wife, Janice, at his side.
"I am grateful for the jury's hard work in weighing all the evidence and thank them for their commitment to finding the truth," Tannin said in a written statement.
The verdict could discourage government investigations of possible wrongdoing at other companies at the center of the global financial crisis, including bailed-out giant insurer American International Group Inc (AIG.N) and the bankruptcy of Lehman Brothers Holdings Inc LEHMQ.PK.
"Given the resources and attention given to this case by the government, the result is surprising," said Larry Ellsworth, a former senior lawyer with the U.S. Securities and Exchange Commission.
Much of the government's evidence in the case was focused on emails among the two men, other colleagues at Bear Stearns and investors. The government said investors were lied to or misled on at least two conference calls with investors.
The defense argued that prosecutors took snippets of emails and presented them out of context, a point that appeared to resonate with the jury.
"If you put small sentences and you put them together ... you could make it say anything," juror Aram Hong, a 27-year-old hotel aide, told reporters after the verdict.
The government had accused the men of lying by touting the funds to investors while expressing in private emails their fears of a market calamity.
"The supbrime market looks pretty damn ugly," one email by Tannin in April 2007 said of a colleague's internal report.
"If we believe the (report) is ANYWHERE CLOSE to accurate I think we should close the funds now. The reason for this is that if (the report) is correct then the entire subprime market is toast."
One professor said it is up to the prosecution to show that the law was indeed broken.
"It sends a strong message to prosecutors that they need to be able to prove their case. Just losing money in and of itself is not a crime," said Jim Angel, associate professor of finance at Georgetown University's McDonough School of Business.
The case is USA v Cioffi & Tannin, U.S. District Court for the Eastern District of New York, No. 08-415.
(Reporting by Grant McCool; Additional reporting by Walden Sieuw, Dan Wilchins, Jonathan Stempel, Jonathan Spicer and Caroline Humer; Editing by Bernard Orr, Andre Grenon, Gary Hill)