Bear Stearns Execs' Trial Offers Look Inside the Financial Meltdown

Two former Bear Stearns hedge fund managers face counts of fraud, conspiracy.

Oct. 13, 2009— -- The criminal trial of two former Bear Stearns executives, Ralph Cioffi and Matthew Tannin, gets under way this week and a lot of people on Wall Street -- and beyond -- are playing close attention.

The high flying money managers are charged with securities fraud and face 20 years in prison if convicted.

In a 28-page indictment, the government alleges that both 53-year-old Cioffi and 47-year-old Tannin knew their hedge funds were "at risk of collapse" but "rather than disclosing the true state of the Funds ... agreed to make misrepresentations in the ultimately futile hope that the Funds' bleak prospects would change."

Those bleak prospects didn't change. The two hedge funds in question were heavily invested in subprime mortgages and eventually lost 100 percent of their value, resulting in a loss to investors of more than a billion dollars.

The alleged false statements and misrepresentations, according to the government, included Tannin telling investors in March 2007 that he was going to add more of his own money to the fund -- although he never did. That alleged false statement encouraged investors to put more money into the fund, according to the indictment, which also alleges that Cioffi never told investors that he was actually transferring $2 million of his own money out of the fund.

In addition, the government alleges that Tannin and Cioffi circumvented the Bear Stearns' email system by using their own personal email accounts and those of their wives.

On April 22, according to the indictment, Tannin recommended in an email to Cioffi that they close the funds. "If we believe the [collateralized debt obligation's report is] ANYWHERE CLOSE to accurate I think we should close the funds now," he allegedly wrote.

And yet both men continued to tell senior Bear Stearns personnel and investors that the Funds "were in good shape and would continue to be successful," the indictment said.

This case has captured the headlines in part because it is intimately tied to the financial crisis and the mortgage meltdown and because investor outrage still runs high.

Bear Stearns Executives Face Trial on Fraud Charges

But perhaps more significantly, the trial is likely to lay bare some of the inner workings of Wall Street and answer some fascinating questions about what information money managers have a duty to disclose.

But David Siegal, a former prosecutor and currently a partner with the law firm Haynes and Boone, cautioned that this trial may not have the wide-ranging implications many believe.

"This is not an indictment of Bear Stearns," he said. "This is a narrow case about two fund managers specifically relating to what they said to investors and others and about whether or not they had criminal intent."

That alleged criminal intent is key because the prosecution needs to convince the jury that Tannin and Cioffi intended to mislead their investors, not just that their statements weren't true.

And even with the damning emails and millions of pages of documents, the prosecution may have a difficult time proving its case.

The defense will try to prove that in 2007 Tannin and Cioffi were just trying to understand what was happening in the financial markets like anybody else, and the fact that they got it wrong doesn't make them criminals.

"In a sense you've only gotten one side of the story," a person with knowledge of the case told "What is hoped is when the jury hears the full emails and the context and hears the full conference call ... they will come to understand what these guys were doing."

Of course, investor outrage is at play here too. Even though the two hedge funds Cioffi and Tannin managed only sold to high-end clients with millions to invest, the jury pool is likely to come from significantly less well-heeled citizens -- people who have seen their 401Ks vaporized and their investment portfolios melt away.

The judge in the case recently ruled that the millions Cioffi and Tannin made on Wall Street and their lavish lifestyles will not be brought up at trial. Still, the bottom line for both defendants may turn on something as simple as bad timing.

"It's a bad time in general to be a white collar defendant facing criminal charges in America, especially if you made a lot of money," Siegal said.