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My Thoughts on the Bear Stearns Hedge Fund Case

Posted by Larry Doyle on November 11, 2009 10:26 AM |

Ralph Cioffi and Matthew Tannin

Ralph Cioffi and Matthew Tannin

Does yesterday’s verdict in the Bear Stearns hedge fund case establish a precedent that precludes likely guilty verdicts in other financial fraud cases? Let’s hope not.

I did not sit in on this trial, so I am not about to weigh in on the verdict. Consensus opinion from those who did sit in on the trial seems to agree that the prosecution presented a very weak case. Additionally, the prosecution was challenged from the standpoint of not being able to admit selected and seemingly incriminating e-mails as evidence.

The not guilty verdict in this specific case does not preclude Cioffi and Tannin from facing other charges. What was the key to this case? The Wall Street Journal sheds light on this case and verdict in writing, U.S. Loses Bear Fraud Case:

The acquittals are a setback for the U.S. attorney’s office in Brooklyn, N.Y., which along with several other offices is investigating Wall Street for possible criminal wrongdoing stemming from the credit crisis, including at Lehman Brothers Holdings Inc. and American International Group Inc. In Tuesday’s case, the question boiled down to this: Were the two men misleading investors, or simply putting a positive spin on sagging returns?

Jurors in Brooklyn found there was no evidence beyond a reasonable doubt that the defendants had criminal intent and conspired to mislead their investors. There “was nothing that was clear and convincing,” said juror Tabasam Bhatti, a 31-year-old civil servant. The prosecution didn’t provide “enough information,” he said.

Not enough information. Interesting. Having followed reports and developments on this case, I am left with the opinion that the prosecution targeted the ‘final weeks, days, and hours’ of this financial meltdown.

Would they ever have thought to more fully investigate and present information pertaining to the marketing material for the Bear funds? If so, what may the prosecutors have found? Let’s review what William Cohan put forth in his book, House of Cards, starting on page 309. Cohan highlights that monthly customer statements put forth by Cioffi and Tannin misrepresented the funds’ sub-prime mortgage exposures. Specifically, a December 2006 statement for the High Grade Fund claimed the fund had only 6.2% sub-prime mortgages. Cohen, who in writing his book spoke extensively with Bear Stearns insiders, claims this number was grossly underestimated.

Cohan puts forth that subsequent customer statements also misrepresented the sub-prime exposure.

I always viewed this material as the critically important information in the case.

Guilt or innocence is not mine to ascertain. I respect our system of justice. That said, I would only hope that in order for justice to be properly served all pertinent information is presented.

What is the lesson for investors? Once again, Buyer Beware!!


  • Larry –

    Some of the other juror’s quotes after the trial are very confusing to me. One juror said “If this really was a fraud case, they wouldn’t have worked that hard”. Huh? What on earth does that have to do with anything? Bernard Madoff worked very hard too, but that didn’t mean he was innocent. Criminals can and do work just as hard as anyone else. That is completely irrelevant. This juror was very impressed that these guys were at work at 4am. So? A lot of Wall Street executives start work very early and work long hours (as you well know Larry), that’s just the nature of the industry. The juror assumed that they were working long hours because they were trying to save the funds. That’s possible, but it’s just as possible that they were working long hours to cover up their fraud so they wouldn’t get caught and wouldn’t get in trouble. I can’t believe that was a primary reason to acquit them. That juror then said that she would invest her money with these guys. Are you kidding me?

    Another juror said that the fact that one of these guys moved his own personal money OUT OF the hedge fund in question and into another different Bear Stearns fund showed that it was not a fraud. Again, huh? Doesn’t the fact that he moved his own personal money out of this hedge fund (regardless of what he then did with it) show that he personally did not believe this fund was a good, stable investment, but clearly did not share that personal belief with his clients?


    • Larry Doyle


      I do not disagree in regard to your first point. Working hard has nothing to do with committing fraud or not. Does that go to the depth of knowledge and understanding of the situation Most likely. Why do so many defendants spend so much money on experts in jury analysis and selection? Very often that jury selection process is where these case are won and lost.

      In regard to point two, while Cioffi took $2 million out, he supposedly left $4 million in the fund. Knowing that I would not have even attempted to bring this charge.

      I still believe the crux of the case revolves around proper representation of the investment portfolio. I never heard any of the material or info pertaining to that.

  • It does appear that jury selection was a big part of this outcome. As you said, it appears that at least some of the jurors didn’t understand this case and the subject matter. Not surprising really given that it is complicated. I agree that if Cioffi left $4 million of his own money in the fund, then I wouldn’t have even brought it up.

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