Prosecution in Trial of Ex-Bear Stearns Fund Managers Has Topsy-Turvy Week
By Andrew Longstreth
October 29, 2009
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Week three in the criminal trial of former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin isn't quite over, but it's already been a very eventful several days for prosecutors, who are attempting to prove that Cioffi and Tannin defrauded investors. Here's a handy Lit Daily recap of the action so far.On Monday, Brooklyn federal district court judge Frederic Block ruled that prosecutors could not introduce a personal e-mail in which Tannin wrote (to himself, via his Google e-mail account) that the hedge funds he helped run could "blow up." As we noted in our trial preview, prosecutors had planned to use the potentially explosive e-mail evidence to show that Tannin was hiding the true state of the funds from investors. But Judge Block found the search warrant to Google for Tannin's personal e-mails to be unconstitutionally broad, since "it did not, on its face, limit the items to be seized from Tannin’s personal e-mail account to e-mails containing evidence of the crimes charged in the indictment, or, indeed, any crime at all." The ruling was a huge win for Tannin's lawyer, Susan Brune of Brune & Richard, particularly because prosecutors tried to disqualify her firm based of her advice to Tannin about his Google e-mail account.
Things appeared to take a turn for the better for the prosecution Tuesday, when government witness Evan Kerr, a former Bear Stearns managing director for hedge fund sales, testified that Cioffi had not been straight with fund investors on a conference call about redemptions. As Dan Slater notes in his DealBook coverage of the Bear trial, it's tough for the government to argue that hedge fund investors--a savvy bunch who often conduct their own financial analyses--are being duped by fund managers. But no amount of independent analysis can help investors detect when the fund manager is lying about redemptions.
Brooklyn assistant U.S. attorney Irene Jaroslaw scored big points during Kerr's direct examination, Slater reports. She asked Kerr whether "these sophisticated investors [would] have any way of determining on their own the level of redemptions submitted by other investors." Kerr's reply: "Not without speaking to someone like me."
Another crucial moment in the case could be coming soon. On Tuesday, Judge Block acknowledged receiving a letter from Brooklyn U.S. attorney Benton Campbell, who is seeking to introduce new evidence that Cioffi skirted internal Bear procedures to pledge his hedge fund investments as collateral in a Florida real estate deal. In the letter, Campbell asserts that the new evidence "will demonstrate that the defendants 'went criminal' months before the conspiracy charged in the indictment, which is something the jury is entitled to know." Fortune has a detailed and perceptive analysis of the Florida deal by House of Cards author William Cohan, who argues that it may become "the centerpiece of the government's case." According to this September 16 Bloomberg story, the government only began to develop the Florida real estate angle shortly before the trial.
Cioffi's lawyers at Williams & Connolly called the Florida deal a "red herring" since the pledge was ultimately approved by Bear's head of accounting.
Judge Block is expected to rule on the government's request any day now, but on Tuesday he offered a warning to prosecutors. "If the focus is going to be what happened to [the Florida bank], this has nothing to do with this trial....It really tries to paint the defendant as dirty, and I'm troubled by, frankly, that collateral matter."
