Emails, Wall St crisis key in Bear Stearns trial
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 to take over Bear Stearns.
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 financial climate.”
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 Frederic Block.
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 change payday loan lenders.”
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, 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.
FEARFUL EMAIL
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 toward the former.”
An even earlier email, from November 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 last week. For details, double-click
Filed under: economics by Forest