Jury ponders fate of Bear Stearns duo in first credit crunch trial

Managers accused of fraud over collapse of hedge funds that heralded meltdown
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The Independent Online

Prosecutors were last night awaiting the outcome of their efforts in a Brooklyn courtroom to win the conviction of two former hedge fund managers at Bear Stearns at the end of the first criminal trial directly connected to the meltdown of the world financial system last year.

Closing arguments were delivered in the trial of Ralph Cioffi, 53, and Matthew Tannin, 48, at the end of last week, and US District Court Frederic Block yesterday took more than 90 minutes to instruct the 12 jurors on the charges in Brooklyn federal court. "There is a lot here to absorb, I understand that," Judge Block told the jurors, who have heard four weeks of arguments and testimony about the world of hedge funds, repo lending and subprime mortgage-backed securities. Some observers expected jurors to reach verdicts quickly.

The two defendants were accused by the government in June last year of having lied to investors in two funds they managed at Bear Stearns before the bank imploded and was sold at a fire-sale price to JP Morgan Chase.

Both men have been charged with securities fraud, wire fraud and conspiracy, while Mr Cioffi, who was Mr Tannin's boss at the bank, is also charged with insider trading. Each man, described by prosecutors at the trial as "masters of the universe" who had been interested only in saving themselves as the sub-prime mortgage collapse started to accelerate, could face up to 20 years in prison.

Last week's closing arguments brought an emotional appeal to the jury from Susan Brune, lead defence lawyer for Mr Tannin. While he sat quietly and soberly, she began to cry. "Send Matt home to his family," she said during her final summation.

Acquittals in the case would cast a chill over future efforts by the government to bring criminal cases arising from the financial crisis. The government is known to be looking actively for evidence of criminal wrongdoing related to the bailout of the American International Group, AIG, and the collapse in September last year of Lehman Brothers Holdings.

When the two funds managed by Mr Cioffi and Mr Tannin fell apart in 2007, the losses for the investors in both of them amounted to $1.6bn. It was several months later that Bear Stearns itself came undone, signalling to the world the seriousness of the financial meltdown that was to come.

Central to the prosecution were records of emails when the subprime market was first showing signs of crumbling. Defence lawyers complained, however, that excerpts were being presented to the jury out of context and were therefore unfair and misleading.

One of those emails, from Mr Tannin to Mr Cioffi, referred to a report highlighting the difficulties that lay ahead. "The subprime market looks pretty damn ugly if we believe the [report] is ANYWHERE CLOSE to accurate I think we should close the funds now," said part of one such message. "The reason for this is that if [the report] is correct then the entire subprime market is toast." Prosecutors told the jury that the two men encouraged investors to add money to the two funds when they must have known they were in trouble.

Ms Brune was adamant that the email passages could not be taken as evidence to convict her client. "They want to freeze-dry that Matt email and stick it to him," she told the jury. "It is absolutely not right."

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