Ex-Bear Stearns Hedge Fund Execs Found Not Guilty

November 10, 2009 (PLANSPONSOR.com) - Two Bear Stearns executives who ran hedge funds that collapsed after betting heavily on the subprime mortgage market have been acquitted of lying to investors.

A jury in federal court in Brooklyn deliberated about eight hours over a two day period before finding Ralph Cioffi and Matthew Tannin not guilty of conspiracy and other charges in an alleged scheme that cost 300 investors about $1.6 billion – and nearly caused the demise of Bear Stearns itself before a rescue buyout by JPMorgan Chase & Co. 

The pair were accused in June 2008 of encouraging investors to stay in their hedge fund, heavily invested in subprime mortgages, though they knew the credit market was in serious trouble.  They had been charged with three counts of securities fraud and two counts of wire fraud. Cioffi was also charged with insider trading, according to the Associated Press.  The two were sued by Bank of America last year, accused by the bank of hiding the funds’ poor health in order to the draw it into a complicated $4 billion transaction in which mortgage-backed securities controlled by the funds were pooled to support the sale of other securities (see BoA Sues Previously Indicted Bear Stearns Hedge Fund Managers). 

The AP reports that, after the verdict, some jurors told reporters that they concluded that the evidence against Cioffi and Tannin was flimsy and contradictory, while others suggested the pair were being blamed for market forces beyond their control.   

In a statement, U.S. Attorney Benton Campbell said, “We are disappointed by the outcome in this case, but the jurors have spoken and we accept their verdict.” 

E-Mail Trail

The decision followed a month-long trial during which prosecutors relied on a series of e-mails they alleged revealed behind-the-scenes alarm at the hedge funds as investments in complex, high-risk securities tied to the subprime market began to lose value. The Bear Stearns case against Cioffi and Tannin focused on a series of e-mails, including one in one of which Tannin said, “I think we should close the funds now,” and “the entire subprime market is toast.” Prosecutors say Cioffi pulled $2 million of his own cash from the fund, while the pair still told investors to stay in and that the outlook was good, and Tannin encouraged an investor to add money to the fund saying he would do the same, but never did. 

Defense attorneys sought to convince the jury that the e-mails were taken out of context, according to the AP.   Cioffi and Tannin, they said, had no motive to steer investors off a cliff, and were honest with them about the volatility of the market, according to the report.