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: Quad Advisors’ Borish Is Looking For Real Traders, Not Index Huggers

Aug 20 2014 | 1:43pm ET

Peter Borish, who served as founding partner and director of research at Tudor Investment...

Lifestyle

Viking Manager In Rent Dispute

Aug 11 2014 | 4:14am ET

A hedge fund manager is demanding most of his money back from his former landlord...

Guest Contributor

Looking Ahead: What’s In Store For Managed Futures?

Aug 22 2014 | 12:52pm ET

The last five years were phenomenal for investors in equity indices. Will the next...

 

Editor's Note

 

Futures Magazine

PREVIEW July/August 2014 Cover

Inside Futures' 500th Issue

The July/August 2014 issue is our largest in years—filled with the best trading strategies and stories from 43 years of being the primary publication for commodity, stock, options and forex traders.

The Alpha Pages

TAP July/August 2014 Cover

Real talk on alternative investments, business & finance

The Alpha Pages Editor's Note