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Trial of Bear Stearns duo starts in New York
When Cioffi and Tannin talked up their funds, was it just positive spin – or was it fraud?
Two years after Bear Stearns began its slide into financial chaos, taking the rest of the banking world with it, a trial gets under way in New York today aimed at holding to account two men who held key positions at the bank.
In July 2007, at a time when it was still one of most of Wall Street most admired institutions, Bear Stearns suddenly announced it was shutting down two of its high-risk investment funds at a loss of $1.4bn (£847m) and that investors in them would receive little or no money. By March 2008, the remains of the bank that was once worth $18bn were being picked up by JP Morgan for just $240m.
The two funds that began Bear Stearns' fall from grace were the High Grade Structured Credit Strategies fund and the High Grade Structured Credit Strategies Enhanced Leverage fund. They were run by Ralph Cioffi with Matthew Tannin as chief operating officer, and it is their behaviour that will be under the microscope when they enter the dock in Brooklyn's district courthouse.
Cioffi and Tannin are facing charges of securities fraud and "conspiracy to defraud the United States". Cioffi will face a further charge of insider trading for using non-public information in his decision to withdraw $2m of his own money from the Enhanced Leverage fund ahead of other investors in March 2007.
The prosecution's case will stand or fall on the question of whether the upbeat information the defendants relayed to investors represented an intent to deceive or whether it was merely a case of Cioffi and Tannin putting a positive spin on a sticky situation. In an effort to prove an intention to deceive, the prosecution will focus on the disparity between what the two bankers were telling each other in emails – and what they were telling their clients in the run-up to July 2007.
One email sent in April 2007 by Tannin to Cioffi reads: "If we believe [the analysis] is anywhere close to accurate I think we should close the funds now... if it's correct then the entire sub-prime market is toast." Court documents allege that three days later Tannin and Cioffi told investors in a conference call that they were "very comfortable with exactly where we are".
The defence team will argue the prosecution is taking such emails out of context and that they were just a small part of a much larger discussion that all bankers were having about economic conditions at the time. In a Herculean effort to show the exact context of the emails, the prosecution has submitted nine million pages of evidence.
Cioffi and Tannin are the only Wall Street executives to face trial for their part in precipitating the financial crisis so far. It is thought they will benefit from facing Judge Frederic Block, a man who thinks federal sentencing guidelines are harsh on white-collar criminals. Many would argue that rather than facing a 20-year prison sentence, the two men should at worst be sued for negligence. ·
