Bear Stearns Fund Judge to Weigh Lawyer’s Conflict

Date: Tuesday, October 6, 2009
Author: Patricia Hurtado, Bloomberg

A judge scheduled a hearing on whether a lawyer for Matthew Tannin, a former Bear Stearns Cos. hedge fund manager accused of fraud, has a conflict of interest that disqualifies her from participating in the case.

Prosecutors asked U.S. District Judge Frederic Block in New York today to decide whether the attorney, Nina Beattie, has a conflict because she may have to testify about an e-mail account Tannin allegedly closed, which the Securities and Exchange Commission had ordered him to keep.

Tannin, 47, and Ralph Cioffi, 53, are to go on trial Oct. 13 for participating in a fraud that helped bring down the securities firm. Prosecutors are seeking to include his deletion of the messages as government evidence of his “consciousness of guilt.”

“What does this e-mail say? Is it lengthy?” Block asked today. After listening to lawyers, Block set a hearing for Oct. 8, saying, “I don’t think it’s fair to deal with it today.”

Prosecutors asked Block to hold what is called a “Curcio” hearing to determine whether a conflict of interest exists between the client and his defense lawyer, whether the conflict is waivable and if Tannin knowingly and voluntarily waives the conflict. Prosecutors said the hearing is necessary because convictions in some federal cases have been reversed because of “Curcio” conflicts.

‘Advice of Counsel’

Tannin closed his Gmail e-mail account “on advice of counsel,” said Susan Brune, one of his lawyers. She didn’t name the lawyer who had given him the advice.

Brune said the e-mails were preserved and Tannin provided them to the government.

Prosecutors said Tannin may need Beattie’s testimony to support his claim that he turned over the e-mail.

“If Tannin intends to argue that his production of the Gmail was ‘voluntary’ ” prosecutors said in court papers filed Oct.2, “the government must have the opportunity to rebut this argument.”

The e-mails in Tannin’s Gmail account were “deleted” on Mar. 11, 2008, prosecutors said, citing a letter from Google Inc., the service provider.

Prosecutors said they have several of Tannin’s Gmail messages. A message Tannin sent to Cioffi and Ray McGarrigal, another Bear Stearns fund manager, on April 22, 2007, is cited in the June 2008 indictment.

‘Market is Toast’

“The entire sub-prime market is toast,” Tannin wrote in the e-mail. “There is simply no way for us to make money -- ever.”

At the same time, the men were urging clients to put money in the fund, which was invested in securities built on subprime mortgages, the government said.

Prosecutors said they got the e-mail from McGarrigal’s lawyer, whom they want to call as a witness.

Assistant U.S. Attorney James McGovern said the government should be allowed to use evidence of the deleted messages in prosecuting Tannin.

“It’s an intentional act to delete your account,” McGovern told the judge.

Answering Judge Block’s question about the significance of the Gmail messages, the prosecutor said one message is quoted at length in the indictment.

“We should be allowed to argue that it wasn’t voluntarily produced,’” McGovern said.

$1.6 Billion of Losses

Cioffi and Tannin are accused of misleading clients about two hedge funds that failed in July 2007, costing investors $1.6 billion. The implosion helped trigger the credit crunch and the eventual sale of Bear Stearns to JPMorgan Chase & Co.

Three days after the “toast” e-mail, Tannin told investors on a conference call he was “very comfortable with exactly where we are,” adding, “there’s no basis for thinking this is one big disaster,” according to the government.

The defendants assured two investors in 2007 that their money was safe in the funds, prosecutors said. The prosecutors said they plan to call the investors as witnesses.

Block denied the government’s request to present evidence of Cioffi’s membership in country clubs and his ownership of at least three Ferraris.

“No, I’m not going to allow it” Block said. “They will know this person made $20 million a year. The jury is going to know you’re dealing with a wealthy person here.”

Defendants’ Roles

Cioffi managed the two funds that collapsed and Tannin was his chief operating officer. The investment bets by their funds, which put most of their assets in subprime-mortgage related securities, failed in June 2007 when prices for collateralized debt obligations linked to the loans fell amid rising late payments by borrowers with poor credit.

Lawyers for both men declined to comment today as they left court.

Earlier, Block addressed a panel of about 300 prospective jurors who were sworn and asked to fill out a 20-page questionnaire. Block urged potential jurors not to read news reports about the case. He also told them not to research the case or the defendants on the Internet.

“A lot of you are curious and may go on the Internet,” Block said. “I beseech you to just stay cool and don’t look up anything.”

The questionnaire, which is designed to weed out unsuitable jurors, asks questions about prospective juror’s opinions of Wall Street, the credit crisis and their source of news information.

Questionnaire

“This case involves two Bear Stearns hedge funds that closed in the summer of 2007, but is not a case about the end of Bear Stearns as an investment banking entity,” the form states. “Have you heard, read or seen anything about this case concerning the two hedge funds?”

The questionnaire also seeks to weed out negative opinions among potential jurors about the credit crisis.

“Recently there have been press reports about allegations of wrongdoing by banks, corporations and executives as well as ups and downs in the sock market and a ‘credit crisis’ ” the questionnaire states.

The form asks if the jurors’ exposure to press reports could affect their ability to be fair and impartial to Cioffi and Tannin.

Block said he expects to select about 75 potential jurors from today’s pool. He said will question the prospective jurors individually for a panel of 12 jurors and six alternates.

Cioffi, now with Tenafly, New Jersey-based RCAM Capital LP, and Tannin face as long as 20 years in prison if convicted of conspiracy to commit securities fraud. Cioffi faces an additional 20-year term if found guilty of insider trading.

The case is U.S. v. Cioffi, 08-cr-00415, U.S. District Court, Eastern District of New York (Brooklyn).

To contact the reporter on this story: Patricia Hurtado in federal court in Brooklyn, New York, at pathurtado@bloomberg.net.