The Bear Stearns Trial Is Underway

[WSJ_law_blog]

Law Blog colleague Amir Efrati has an article today about what’s going on at the New York criminal trial of former Bear Stearns hedgies Ralph Cioffi and Matthew Tannin.

The two are facing securities-fraud charges for allegedly lying to investors as their subprime-mortgage heavy funds were in peril. The case, Efrati writes, will “test the limits of putting a positive a spin on bad news.” The funds collapsed in July of 2007, costing investors about $1.6 billion.

Tannin’s lawyer Susan Brune said that her client had worried about the hedge funds he managed but that “worrying is not a crime.” She said that Tannin was convinced Cioffi, his boss, “had a plan to return the funds to profitability.”

But prosecutors argued that Cioffi and Tannin knew their success as fund managers was coming to an end, so they began a campaign of lies to keep investors from withdrawing funds.

Efrati also sent along some Law Blog bonus coverage of the trial, including how defense counsel have employed peach baskets and have tried to humanize the once high-flying hedge fund managers.

Efrati writes:

In their opening statements, defense lawyers spent much of the time explaining the complexities of investing in mortgage-related bonds, and why the funds collapsed. They bombarded the mostly working-class jurors with investment lingo such as “leverage,” “hedges,” and “illiquid assets.”

One lawyer played a tape recording of a January 2007 conference call in which Cioffi used terms such as “stable spreads” and “credit deterioration.”

Cioffi’s legal team used 10 peach baskets to show how the fund could increase its buying power by 10 times through leverage, in which the funds used borrowed money to make investments. That allowed them to increase returns for investors in good times, but it also increased the chances of collapse if the market for mortgages turned ugly. When that occurred in 2007, the banks that loaned money to the funds could seize the funds’ assets, which hurt investors in the funds.

The lawyers painted Cioffi and Tannin as victims of the financial crisis. One attorney told jurors that Cioffi, who earned about $30 million in the two years before the funds collapsed, lost 77% of his net worth.

The defense lawyers also tried to humanize their clients, highlighting the career paths of the managers and casting them as devoted family men. Brune told jurors they would see evidence of Tannin’s undergraduate philosophy degree in his emails. Cioffi’s lawyer said after college his client traveled from his home in Vermont to New York with $200 in his pocket, hoping to earn money as a banker.