Former Bear Stearns executives acquitted of lying to investors
Wall Street test case U.S. sought convictions for financial crisis

By Zachary A. Goldfarb
Washington Post Staff Writer
Wednesday, November 11, 2009

The government's most prominent criminal case against Wall Street executives accused of wrongdoing in the financial crisis collapsed Tuesday as a jury found two former Bear Stearns hedge-fund managers not guilty of charges they lied to investors when their investments in subprime mortgages turned sour.

The acquittal of former Bear Stearns executives Ralph Cioffi and Matthew Tannin dealt a blow to the government's efforts to hold financial executives criminally responsible for the crisis. The jury's decision capped a two-year drama that began in the summer of 2007, when a pair of hedge funds run by Cioffi and Tannin crumbled, sparking a series of events that led to Bear Stearns's collapse in March 2008 and the ensuing economic meltdown.

With dozens of ongoing investigations into potential criminal wrongdoing at the largest financial companies in the country, the verdict underscores the government's challenge in making the case that Wall Street executives broke the law -- rather than made bad decisions -- in loading up on the risky investments that crippled the financial system.

"I think, and I've always thought, that making successful criminal cases out of the financial meltdown is going to be very difficult for prosecutors," said David Siegal, a former federal prosecutor now in private practice. "You have to prove that somebody intended to defraud their investors as opposed to just being horrible at their jobs."

Cioffi and Tannin faced up to 20 years in prison on charges of conspiracy, securities fraud and wire fraud. Cioffi was also acquitted on charges of insider trading.

A federal grand jury indicted the men in June 2008. Prosecutors said 300 investors lost $1.6 billion.

The trial, in Brooklyn, lasted three weeks, and the jury deliberated for less than two days.

Benton J. Campbell, U.S. attorney for the Eastern District of New York, said, "We are disappointed by the outcome in this case" and "we accept their verdict." Cioffi and Tannin still face wire fraud charges in the Southern District of New York as well a Securities and Exchange Commission civil case.

Tannin and Cioffi released statements thanking the jury.

The case centered on whether Tannin and Cioffi gave their investors an overly optimistic view of how their funds were weathering the subprime storm while privately expressing deep concerns about the state of the market for mortgage-backed securities.

The question is significant because many of the ongoing investigations into financial companies are looking at whether executives made timely and truthful disclosures to investors about the state of their businesses.

Legal experts said proving that executives lied to investors is generally far simpler than showing that business decisions were criminal.

"Most of the cases that are going to be brought out of the subprime meltdown will, in fact, revolve around false statements or omissions, or lying rather than the actual substance of the meltdown itself," said Anthony Barkow, executive director of the New York University Center on the Administration of Criminal Law. "That is, they won't typically revolve around whether people engaged in fraud by business practices that led to the meltdown."

In the Bear Stearns case, prosecutors alleged that Tannin and Cioffi misled investors about the stability of their funds, about whether they were adding personal money to the funds and about the level of redemptions they were experiencing. Prosecutors said the defendants "lied over and over."

Defense lawyers said Tannin and Cioffi had no responsibility to inform investors about their own investments in the funds, and accused prosecutors of taking evidence out of context. They said that just about everyone was blindsided by the financial crisis, bringing R. Glenn Hubbard, dean of Columbia University's Graduate School of Business, who testified that the hedge funds collapsed because lenders stopped making loans to them.

One e-mail that caused a stir was sent from Tannin to the e-mail account of Cioffi's wife, saying that "the entire subprime market is toast." Prosecutors used the e-mail to allege that Tannin and Cioffi knew about the risks in the market but told investors in a conference call that "we're very comfortable with exactly where we are."

But a government witness, a former Bear Stearns employee, surprised the court when he testified that Cioffi's view of the market in that e-mail may have been based on a misunderstanding of an analysis of subprime securities.

The employee suggested that some at Bear Stearns were still actually upbeat about the funds, dealing a blow to prosecutors' case that Cioffi and Tannin had one private set of views about the market and another public view.

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