Bear Hedge Fund Case Prosecutors Seek ‘Consciousness Of Guilt’ Evidence

Oct 6 2009 | 12:07pm ET

With just a week to go before the trial of two former Bear Stearns hedge fund managers accused of fraud is to begin, the judge in the case has begun readying his jury pool. But the prosecution and defense teams are still battling over just what those jurors will hear, and in one case, who they might hear it from.

 U.S. District Judge Fredric Block yesterday denied prosecutors’ request to tell the jurors about the manager of the collapsed hedge funds’ membership in country clubs. Block also said the jury won’t hear about Ralph Cioffi’s three Ferraris.

“No, I’m not going to allow it,” Block said. “They will know this person made $20 million a year.”

But the two sides are still fighting over what could be a much more crucial piece of evidence, one that could keep a lawyer representing Cioffi’s co-defendant on the sidelines.

Prosecutors have asked to admit as evidence Matthew Tannin, the hedge funds’ chief operating officer, deleted Gmail account. They claim that the Securities and Exchange Commission had ordered Tannin to preserve the e-mails in that account, but that he deleted it anyway, making the deletions evidence of a “consciousness of guilt.”

“It’s an intentional act to delete your account,” James McGovern, an assistant U.S. Attorney in Brooklyn, N.Y., told the judge.

“If Tannin intends to argue that his production of the Gmail was ‘voluntary,’ the government must have the opportunity to rebut this argument,” the U.S. Attorney’s Office, said in a court filing. The prosecutors said that they have been forced to get the e-mails from other sources, including one potentially damning missive sent to another Bear fund manager just weeks before the funds collapsed.

Cioffi and Tannin are accused of misleading investors in the two hedge funds, the Bear Stearns High-Grade Structured Credit fund and more highly-levered sister fund, about the health of the funds just prior to their collapse, which cost investors $1.6 billion. Cioffi also faces an insider-trading charge. The failure of the two hedge funds, in July 2007, helped precipitate the collapse of Bear Stearns less than a year later, in March 2008.

According to prosecutors, in an April 22, 2007, e-mail they obtained from a former colleague at Bear, Ray McGarrigal, Tannin lamented the state of his hedge funds, which were heavily invested in subprime mortgage securities.

“The entire sub-prime market is toast,” Tannin wrote. “There is simply no way for us to make money—ever.”

Yet, according to prosecutors, three days later he was extolling the virtues of both the funds and the subprime market in a conference call with investors.

He said he was “very comfortable with exactly where we are,” and of the growing subprime problems, “there’s no basis for thinking this is one big disaster.”

Tannin’s side said the e-mails were preserved, although the account was closed, and have already been provided to the government voluntarily. Both sides indicated at the hearing that they would probably agree to stipulate to the facts of the production of the e-mails, resolving that issue.

But prosecutors opened another can of worms, demanding aconflicts hearing as Tannin's law firm, Brune and Richard, advised him to close the Gmail account. 

Prosecutors sought—and got—the hearing, which is scheduled for Oct. 8. At the hearing, Tannin will likely indicate that he is aware of the potential conflict and voluntarily waives it.

Earlier in the day, Block swore in about 300 prospective jurors in the case. Each filled out a 20-page questionnaire, which seeks to gauge the possible jurors’ knowledge and opinions of Wall Street and the financial crisis. The judge said he planned to pick a smaller pool of about 75 potential jurors based on the questionnaires.

He also warned his panel to avoid researching the case online.

“A lot of you are curious and may go on the internet,” Block said to his pool. “I beseech you to just stay cool and don’t look up anything.”

In Depth

Q&A: Executive Recruiter Talks Hedge Fund Closures, Hiring Trends

Dec 19 2014 | 6:58am ET

This year, hedge funds have been closing at a rate not seen since the financial...


Cooper-Hohn Won't Contest Divorce Settlement

Dec 18 2014 | 9:51am ET

The ex-wife of hedge fund billionaire Christopher Hohn will not contest a divorce...

Guest Contributor

Alternative Investment Funds Face A Communications Imperative

Dec 19 2014 | 6:10am ET

A handful of the top alternative investment firms on both sides of the Atlantic...


Sponsored Content

Editor's Note

    Guidelines for Guest Articles

    Oct 22 2014 | 9:46am ET

    We are always looking for guest articles from hedge fund managers and buy-side firms.

    If you are interested in submitting a contributed piece for possible publication on FINalternatives, please take a look at the specs. Read more…


Futures Magazine

December 2014 Cover

Futures 2014 person of the year

Jeff Sprecher was simply looking for a platform to trade energies when launching ICE 14 years ago but it has grown to reach the pinnacle of both the listed futures and equities world.

The Alpha Pages

TAP July/August 2014 Cover

The Alpha Pages Interview: Senator Rand Paul

Senator Paul sat down in the debut series of the Alpha Pages Interview to discuss the broken tax code, regulation surrounding Bitcoin, and his plans for the 2016 Presidential election.