Former Bear Stearns Execs Acquitted In Fraud Case

By Samuel Howard

Law360, New York (November 10, 2009) -- A federal jury has found two former Bear Stearns Cos. Inc. hedge fund managers not guilty of defrauding investors in the failed funds, setting a daunting example for prosecutors in one of the earliest criminal cases stemming from the subprime mortgage meltdown.

The verdict came down Tuesday in the U.S. District Court for the Eastern District of New York, acquitting Ralph Cioffi and Matthew Tannin of all allegations that the pair concealed the parlous condition of the mortgage-linked hedge funds from investors and issued upbeat forecasts when they knew collapse was imminent.

The jury did not find evidence to back up prosecutors’ charges that Cioffi and Tannin schemed to mislead investors and lenders about the funds’ morbid losses, eventually costing investors $1.6 billion.

Cioffi likewise beat allegations he committed insider trading when he surreptitiously moved $2 million of his own money to safer accounts while assuring investors the funds were in no danger.

In June, Cioffi, the founder of the failed funds, and Tannin, who served as the funds' portfolio manager, became the first Wall Street executives to face criminal charges in connection with the financial crisis when FBI agents took the pair into custody and accused them of committing securities fraud, conspiracy and wire fraud.

Robert Nardoza, a spokesman for the U.S. Department of Justice, said the agency regretted the verdict but was not deterred in its fight to protect investors.

“Of course, we are disappointed by the outcome in this case, but the jurors have spoken, and we accept their verdict,” Nardoza said. “Honesty and integrity are the principles upon which our financial markets function. Enforcing and protecting those principles will continue to be one of the principal efforts of this office.”

In a statement, Tannin thanked his counsel at Brune Richard LLP, as well as the jury for their assiduity.

“I am grateful for the jury’s hard work in weighing all the evidence and thank them for their commitment to finding the truth,” he said.

While Cioffi and Tannin have avoided the hoosegow, the two are far from easy street and continue to face several lawsuits from investors, as well as a civil fraud case by the U.S. Securities and Exchange Commission.

The numerous suits accuse the fund managers of hiding the fact that the funds were suffering substantial withdrawal requests from investors and were on the brink of collapse in spring 2007, a precursor to JPMorgan Chase & Co.'s purchase of Bear Stearns in a government-brokered deal in March 2008.

The funds filed for bankruptcy on July 31, 2007, and are currently being liquidated.

Cioffi is represented by Williams & Connolly LLP and Hughes Hubbard & Reed LLP.

Tannin is represented by Brune & Richard LLP.

The case is United States v. Cioffi et al., case number 08-cr-00415, in the U.S. District Court for the Eastern District of New York.