Securities Fraud Trial of Former Bear Stearns Hedge Fund Managers Ralph Cioffi and Matthew Tannin Begins; Prosecution Delivers Clear Message in Opening Statement.
United States v. Cioffi and Tannin, the Wall Street trial of the century (so far) is underway. The former Bear Stearns hedge fund managers are charged with conspiracy, securities fraud, and wire fraud.
Assistant U.S. Attorney Patrick Sinclair told the jury that defendants Ralph Cioffi and Matthew Tannin "lied to their investors ... to save their multimillion-dollar bonuses" and their careers.
Mr. Sinclair described the former Bear Stearns hedge fund managers as serial liars who misled customers and clients about the performance and prospects of two leveraged Bear Stearns hedge funds. The majority of holdings in the two funds were CDO's packed with subprime mortgage-backed securities.
The trial is in the cross-hairs of the financial services industry because it is the first (and could be the only) criminal prosecution of executives from a major investment bank based on alleged misconduct tied to the subprime meltdown and credit crisis.
During the prosecution's opening statement, Mr. Sinclair described a long string of lies Cioffi and Tannin allegedly told the funds' investors. Because of their actions, the prosecutor told jurors that Cioffi and Tannin were guilty of committing “a [federal] crime ... called securities fraud.”
The two Bear hedge funds collapsed in the summer of 2007. Investors reportedly lost nearly $2 billion.
Facing “sinking markets, the certain collapse of their funds and [knowing four years of] success [were] coming to an end."
Mr Sinclair explained to the jury thart "[Ralph Cioffi and Matthew Tannin] decided to commit a crime.” Facing “sinking markets, the certain collapse of their funds and [knowing four years of] success [were] coming to an end...," the two defendants "lied to their investors to buy more time..."
Apparently, Cioffi and Tannin went into stall mode - hoping for a miraculous recovery in the market for subprime mortgage-backed securities before the funds unraveled. The miracle failed to materialize. The hedge funds imploded.
Our view at WSLB is that defendants' enormous lies other serious misconduct knocked down one of the first dominoes that led to the collapse of Bear Stearns and, ultimately, the global financial crisis. This trial should shine a significant amount of light on the validity of our opinion.
The lawyer for Ralph Cioffi also made an opening statement Wednesday. Tannin's counsel is scheduled to do the same on Thursday.
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ENTRIES IN ONLINE DIARY SHOW ACCUSED BEAR STEARNS HEDGE FUND MANAGER HAD SEVERE ANXIETY OVER BEAR SUBPRIME FUNDS' "BLOW-UP RISK" AT LEAST A YEAR BEFORE FUNDS COLLAPSED.
Throughout the arrests and legal wranglings that preceded upcoming opening statements in the Bear Stearns criminal securities fraud trial, defendant Matthew Tannin has been the other guy. So far,Tannin's co-defendant, Ralph Cioffi, has been alone in the fishbowl. Thanks to recently released E-Diary entries from the summer of 1996, Tannin's second banana status may be nearing an end.
WHO IS MATTHEW TANNIN?
Matthew Tannin is a former Bear Stearns hedge fund manager. He is one of two Bear Stearns employees the Justice Department is prosecuting for securities fraud charges. According to prosecutors, Tannin and co-defendant Ralph Cioffi misled investors about the risks, value, and future prospects of two Bear Stearns subprime hedge funds. The two funds collapsed in the summer of 2007.
Tannin and Cioffi ran the now bankrupt funds for Bear Stearns. The funds were highly leveraged, relying on massive collateralized credit facilities from other financial institutions to buy CDO's and other asset-backed securities. The CDO's were packed with subprime mortgage-backed securities.
After the housing bubble popped, Cioffi and Tannin allegedly began a long, egregious campaign of lies - to creditors and investors - in a misguided (and illegal) effort to save their funds. The subprime mortgage market imploded soon after the end of the housing bubble. Escalating Subprime mortgage defaults rose sharply, decimating the value of the CDO's owned by the Bear hedge funds. The funds' creditors demanded their money back. By July 2007, with no liquidity and a huge stockpile of nearly worthless securities, both funds collapsed. In August the funds declared bankruptcy.
Many observers believe the Bear Stearns subprime fund failures ignited the subprime mortgage crisis, global credit crisis and, ultimately, the worst financial crisis since the Great Depression. Tannin and Cioffi were arrested in June 2008.
Although much of the financial world is focused on the highly anticipated trial and star defendant Ralph Cioffi, defendant Matthew Tannin has, for the most part, has avoided the glare of the spotlight. Even on Wall Street, the name Matthew Tannin is largely an unknown entity. In many cases, people recognize Tannin's name but fail to associate the name with the failed Bear Stearns hedge funds, with Ralph Cioffi, or with the imminent "Bear Stearns" criminal trial.
Part of the reason Tannin has thus far lurked in the shadow of Ralph Cioffi is that Cioffi casts a long shadow. Cioffi, who liked to collect expensive Italian sports cars, is by far the flashier of the two. He also was Tannin's boss and the man who created Bear's subprime hedge funds in the first place. By the peak of the housing bubble, Ralph Cioffi had a high profile on Wall Street. Matthew Tannin was largely unknown.
When the two men were arrested, Ralph Cioffi garnered most of the headlines. The majority of the "cuff shot" photos in newspapers, magazines and on the internet were pictures of Cioffi, not Tannin. Finally, by the time of the arrests in the summer of 2008, Cioffi was already somewhat of a pariah on Wall Street. The failed funds were Cioffi's babies.
Columnists for The New York Times and The Wall Street Journal have stated that the implosion of Cioffi's subprime hedge funds sent Bear Stearns into a death spiral from which the investment bank never recovered. The widely perceived connection between Bear's hedge fund fiasco and the company's failure nine months later further added to Ralph Cioffi's notoriety in Wall Street circles.
And so, Matthew Tannin has largely escaped much of the limelight. His E-diary just might change all of that...
THE E-DIARY and THE MEDICATIONS
It seems that Matthew Tannin kept an online diary that contains some interesting revelations. For example, Tannin's diary reveals that, as far back asthe summer of 2006, he was very worried aboutthe "blow up risk"of the subprime hedge funds he helped manage.
Tannin's diary also shows that his concern about the funds was so severe that Tannin suffered from severe anxiety, insomnia and bouts of depression. In the e-diary Tannin wrote:
"This all hit me like a ton of bricks... and the first result -- almost immediately -- was for me to lose my ability to sleep. Classic anxiety. I could not sleep. I would wake up an hour or two after going to be[d]...My mind would be focused on all of the things that I had not done and all of the things that could have gone wrong."
The diary also reveals that - roughly a year before Matthew Tannin's worst fears were realized when the Bear Stearns hedge funds collapsed - Matthew Tannin turned to medication to address his anxiety, insomnia, and depression. His doctor prescribed Lorazepam to ease tension and help Tannin sleep. Tannin also started taking Wellbutrin, a popular antidepressant.
After the psychiatric medications stabilized his mood, Tannin wrote more about the pain he had suffered:
"I was incredibly stressed. It is a strange thing to be sitting here now (albeit on Wellbutrin) and reflect back about the stress. . . .Spreads are tight and credit is deteriorating. I was worried that this would all end badly..."
Tannin was, of course, right to worry. He knew things would go wrong by mid-2006 (at the very latest). And if Matthew Tannin saw the handwriting on the wall regarding the disastrous fate of the Bear subprime hedge funds, you can bet that MBS experts like former Bear Stearns co-President Warren Spector saw the same handwriting on the same wall.
Not only is the trial of former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin the sole major criminal prosecution stemming from the financial crisis, but, as we've noted, it's a broader test of the fine line between salesmanship and fraud.
WSJ's Law Blog has a nice run-down today of the pre-trial, which has seen new allegations introduced and a fight over admissible evidence.
Specically, prosecutors are trying to admit evidence at trial that:
Cioffi tried to obtain documents in Florida that were the subject of a government subpoena.
Tannin’s Tablet PC, which he used as an electronic notebook, and a handwritten trading notebook used by Cioffi between January 2007 and June 2007 — which includes the period of the alleged fraud — are missing.
Then there's the Gmail issue. As Law Blog notes, "Tannin allegedly shut down his personal Google emailaccount in March 2008, several months before he was charged, after he was aware the government had interest in the account and after it ordered that all emails and documents relevant to the hedge funds be preserved."
The Gmail account is critical because it's where Tannin may have written damning emails -- privately saying that the funds were in serious trouble while publicly crowing about their success. Defense lawyers saythe firm told Tannin to shut down the account and besides, there's no legal obligation to turn over the emails.
Reprinted w/permission pursuant to terms and conditions