Trial of Former Hedge Fund Managers Begins

Trial of Former Hedge Fund Managers Begins in Federal Court

Mark Fass

New York Law Journal

October 15, 2009

Opening statements got under way Wednesday in the closely watched federal trial of two former Bear Stearns hedge-fund managers accused of touting their subprime-mortgage-backed fund even after they believed the market was going to implode. The funds crashed in June 2007, costing investors $1.6 billion.

Defendants Ralph Cioffi and Matthew Tannin "lied over and over again in an attempt to keep their investors in these funds," Eastern District of New York Assistant U.S. Attorney Patrick Sinclair told the Brooklyn jury during opening arguments.

The two central lies, Sinclair said, were that the defendants were continuing to increase their own investments in the funds and that other investors were not making substantial withdrawals.

Cioffi managed the two funds that collapsed, and Tannin was his chief operating officer. Both face up to 20 years in prison if convicted of the most serious charge against them -- securities fraud.

Beginning in February 2007, when one of the two funds managed by the defendants began losing money, Tannin misled investors at least 11 times, Sinclair told the jury.

"But it was a lie!" Sinclair said sternly. "He never added a penny. His partner Ralph Cioffi was reducing, that's right reducing, his investment."

Cioffi's attorney, Dane Butswinkas of Williams & Connolly, opened with an allegory about the dangers of taking information, such as his client's e-mails and phone calls, out of context. He once walked past his children as they were putting together a puzzle on a table, he told the jurors. The image appeared to be a barnyard scene, based on the picture on a nearby box. But when put together, the pieces became a castle, horses and dragons.

"It turns out that the box sitting on the ground was for a different puzzle," Butswinkas said. "Believe it or not, the government tries to put pieces from a puzzle into the wrong box, and that's what happened here."

The largest subprime-related criminal action to go to trial thus far, the case is on course to become for the present recession what the Enron and Martha Stewart cases were a decade ago -- a symbol of the corporate-malfeasance that defines an era.

Eastern District Judge Frederic Block is overseeing the trial, which is expected to last about six weeks.

Wednesday's openings brought a capacity crowd -- even the overflow room for watching on closed-circuit television nearly overflowed. Many of Brooklyn's senior federal prosecutors attended, including U.S. Attorney Benton J. Campbell.

The prosecution has said it intends to call about 38 witnesses and present more than 500 exhibits to establish that the defendants committed securities fraud, wire fraud and conspiracy, and that Cioffi committed insider trading. Both defendants face up to 20 years in prison.

The government's key evidence appears to be e-mails sent from private accounts, in which the defendants wrote about their worries of the funds collapsing, and their simultaneous pronouncements to investors, in which they speak optimistically about the economic climate and encourage their clients to stay in the funds, or even boost their investments.

"I'm fearful of these markets," Cioffi e-mailed a colleague on March 15, 2007. "[Tannin] said it's either a melt down or the greatest buying opportunity ever, I'm leaning towards the former. As we discussed it may not be a melt down for the general economy but in our world it will be."

That same day, Tannin told an investor, "[W]e are seeing opportunities now and are excited about what is possible. I am adding capital to the fund. If you guys are in a position to do the same I [think] this is a good opportunity."

Just three months later, the two funds run by Cioffi and Tannin collapsed.

Cioffi is represented by a team of partners from Williams & Connolly -- Butswinkas, Brendan V. Sullivan Jr., Margaret A. Keeley and Jonathan M. Landy -- as well as Hughes Hubbard & Reed partners Edward Little and Marc Weinstein.

Tannin is represented by Susan Brune and Nina Beattie from the litigation firm Brune & Richard.

Brune will present Tannin's opening argument Thursday morning.

Along with Sinclair, Assistant U.S. Attorneys Ilene Jaroslaw, James McGovern and Brian Sano are prosecuting the case.