* Ex-Bear Stearns hedge fund managers accused of fraud
* Their emails are a battleground in the case
* June 2007 failure of two funds lost investors $1.4 bln
* The two managers deny any wrongdoing
* Perceptions of Wall Street crisis may be critical
By Grant McCool
NEW YORK, Oct 11 When two former Bear Stearns
hedge fund managers go on trial on Tuesday on charges they
misled investors over risky securities, their attorneys may
have to fight a perception that Wall Street is in the dock over
the financial crisis.
Big money managers Ralph Cioffi and Matthew Tannin are the
first Wall Streeters from a listed company that was bailed out
by the government in 2008 to be criminally charged. The bailout
paved the way for JPMorgan Chase & Co (JPM.N) to take over Bear
The indictment neither charges the pair of causing the
company's demise nor contributing to the financial crisis, but
defense lawyers will be keen to weed out potential jurors who
may harbor such biases.
"Unfortunately, the defendants wear the scarlet 'IB' (for)
investment banker across their chests and this is a problem for
them," said James Cox, professor of law at Duke University in
Durham, North Carolina. "Juries have not been very friendly to
executives who are seen as poster children for an ongoing
Emails written by Cioffi, 53, and Tannin, 48, from late
November 2006 through mid-2007 as the credit crisis loomed,
will be a key battleground in the trial.
Jury selection starts on Tuesday in Brooklyn federal court
with opening arguments expected later in the week for a five-
to six-week-long trial before U.S. District Court Judge
Prosecutors contend that at least by March 2007 -- more
than 18 months before the full extent of the financial crisis
became clear -- Cioffi and Tannin promoted to investors two
funds worth $1.4 billion crammed with subprime mortgage-backed
securities, while privately expressing, in their emails, fears
of a market calamity.
The June 2008 indictment said the pair along with
unidentified others "agreed to make misrepresentations in the
ultimately futile hope that the funds' bleak prospects would
The funds collapsed in June 2007.
Both men deny charges of fraud and conspiracy that could
put them in prison for 20 years. Cioffi has denied an
additional charge of insider trading. No one else has been
criminally charged, but the pair and Raymond McGarrigal, a
senior portfolio manager of the funds, face civil lawsuits.
One is a claim by Bank of America Corp (BAC.N), the largest
U.S. bank, which was the underwriter on a now toxic $4 billion
collateralized debt obligation (CDO), a security backed by a
pool of debt such as mortgages. The CDO was put together by the
two Bear funds.
A subprime mortgage was one obtained by a borrower with a
relatively poor credit history or weaker financial means than a
borrower who qualified for a prime mortgage.
In a March 3, 2007, email cited in the indictment, Cioffi
told Tannin: "the worry for me is that sub prime losses will be
far worse than any thing people have modeled." Four days later,
in an email to a colleague, Cioffi wrote: "I'm fearful of these
markets. Matt said it's either a melt down or the greatest
buying opportunity ever, I'm leaning more towards the former."
An even earlier email, from Nov. 23, 2006, by Tannin in his
private gmail account, was cited by prosecutors in court papers
on Thursday after they obtained a CD-ROM disk from Google Inc
(GOOG.O) last week. For details, double-click [ID: nN08546311]
Tannin, in a diary entry, recounts a meeting with a
colleague in which "I had a wave of fear set over me that the
fund couldn't be run the way that I was 'hoping'. And that it
was going to subject investors to 'blow up risk'."
Lawyers for the men are expected to argue that other
inferences could be drawn from the emails, such as they were
debating possible outcomes for the market.
"If you are managing your hedge fund, you constantly are
assessing your 'what if?' scenarios in your risk profile," said
Jack Sylvia, a New York securities litigator and defense lawyer
who is not involved in the case. "To single out a couple of
hedge fund managers puts the blame on them for the collapse of
an entire class of securities and, to me, is unfair."
Cioffi and Tannin, well-known in the world of hedge funds
but not to the general public, ran the Bear Stearns High Grade
Structured Credit Strategies Master Fund and the High Grade
Structured Credit Strategies Enhanced Master Fund.
Less than a year after the funds fell in the toxic
environment of subprime mortgages, Bear Stearns collapsed,
wiping out billions of dollars in equity for its shareholders.
The company was once valued at more than $45 billion.
FINANCIAL WORLD CRISIS
The trial's outcome will be closely watched by law
enforcement agencies investigating possible malfeasance in the
bailed-out giant insurer American International Group (AIG.N)
and the bankruptcy of Lehman Brothers Holdings Inc LEHMQ.PK
that shook the entire financial world just over a year ago.
The two men, who earned millions of dollars a year, are not
accused of a long-running multibillion-dollar fraud such as
those of executives of other publicly traded companies
WorldCom, Enron or Adelphia Communications a few years ago.
Imprisoned fraudster Bernard Madoff's decades-long
investment scheme of as much as $65 billion through his private
firm is in a category of its own.
But the spotlight shone on Cioffi and Tannin at a key early
moment in the liquidity crisis.
"The question for the jury is going to be whether these
defendants actually believed that the market would collapse,
which would suggest an intent to deceive, or whether they were
merely fearful or suspicious of the market, which may not
necessarily be culpable," said Bill Johnson, who until a month
ago was a white-collar crime prosecutor in a different district
of New York and has returned to private law practice.
Bear Stearns' troubles were an important part of the credit
freeze and the shock to the subprime mortgage market that led
up to the financial crisis, but it was not the fault of Cioffi
and Tannin, their lawyers argue.
"Many in the press unfairly linked Bear Stearns' demise to
the failure of two of its prominent hedge funds," counsel for
the two men said in court papers in May this year.
In the days before the trial, Cioffi's lead lawyer Dane
Butswinkas said only that he was ready to defend the case.
Tannin's lead lawyer Susan Brune declined comment. A spokesman
for the U.S. attorney in Brooklyn declined comment.
The fund managers were arrested by the FBI on the morning
of June 19, 2008, at their homes in New Jersey and New York,
three months after the U.S. Department of Justice announced
"Operation Malicious Mortgage" in response to the
subprime-induced credit crunch.
The case is U.S. v. Cioffi and Tannin 08-415 in U.S.
District Court, Eastern District of New York (Brooklyn)
(Reporting by Grant McCool; Editing by Martin Howell and Jan