Bear Fund Managers Ask U.S. Judge to Dismiss Charges

Date: Tuesday, November 3, 2009
Author: Patricia Hurtado, Bloomberg.com

Lawyers for former Bear Stearns Cos. hedge-fund managers Ralph Cioffi and Matthew Tannin asked a federal judge in Brooklyn to dismiss fraud and wire charges against the two men after prosecutors rested their case today.

Cioffi, 53, the portfolio manager, and Tannin, 48, his chief operating officer, are accused of misleading investors about the health of the funds, which cost investors $1.6 billion when they collapsed in 2007. Cioffi is also charged with insider trading for allegedly moving $2 million, about one third of his investment in the two funds he managed, into a third fund at Bear Stearns, which he also supervised.

Margaret Keeley and Dane Butswinkas, lawyers for Cioffi, asked U.S. District Judge Frederic Block to throw out the charges, arguing that the government didn’t prove its case. Keeley said prosecutors failed to show that Cioffi made material misrepresentations about the health of the funds, that any conspiracy existed between the two men, or that he engaged in insider trading.

“We think there are a number of gaping holes in the government’s case,” Keeley told Block, who didn’t rule immediately on the defense request.

Both defendants have pleaded not guilty. Butswinkas contends the failure of the funds was the result of “a perfect storm” brought on by the financial crisis and that investors whom he described to the jury as “ostriches” didn’t pay close attention to what his client was telling them about the funds.

Judge Questions Charges

Block told lawyers after sending the jury home for the day that he had questions about the wire fraud charges against both men and the insider trading charge against Cioffi. The judge directed both sides to submit their legal arguments to him.

Block said he didn’t understand the insider trading charge. “What was the confidential information?” he asked.

The judge said he wasn’t inclined to immediately dismiss the charges.

“You need not panic,” Block said. “I’m not going to rule overnight. I just want to share what’s going on in my head.”

The Bear Stearns funds failed in June and July 2007 when prices for collateralized debt obligations linked to home loans fell amid rising late payments by borrowers. CDOs are created by packaging assets such as bonds and loans and using their income to pay investors. The securities are divided into different tiers of varying risk, or tranches, and can offer higher returns than the debt on which they are based.

Optimistic Comments

Susan Brune, a lawyer for Tannin, argued in court papers that when he made optimistic comments about the health of the funds, they weren’t untrue statements of material fact. She also argued Tannin had “no duty to disclose internal deliberations of the funds” with investors.

“It is clear that, despite having called nearly 20 witnesses to testify and introducing approximately 150 exhibits, the government has failed to present sufficient evidence,” Brune wrote in court papers. “Accordingly, Mr. Tannin is entitled to a judgment of acquittal on all counts.”

Prosecutors today called their last witnesses, including David Grain, chief executive officer of Sarasota, Florida-based Grain Communications Corp., which owns and operates wireless communications towers throughout the U.S. Grain testified he lost $1 million after investing in one of the funds managed by Cioffi and Tannin.

‘Daily Basis’

Grain, who said he knew former Bear co-president Warren Spector, testified he spoke “on a daily basis” with Shelley Bergman, a Bear broker, and his assistant, Jason Bunin, from February to May of 2007, and neither Bergman nor Bunin told him that Concord Management LLC, a Tarrytown, New York, hedge-fund adviser, intended to pull out its $57 million investment. Both Bunin and Bergman testified earlier in the trial that they didn’t know about Concord’s redemption request at the time.

While Grain said he didn’t specifically inquire if there had been any redemptions, he added, “It would have been important to know.”

Witnesses have testified about a $150 million redemption from the funds’ largest investor, Fix Asset Management, in May 2007.

Grain said he’d decided to withdraw his money from the Bear Enhanced Fund that month and changed his mind after Bergman persuaded him to keep his money in place. Grain said he later learned in June 2007 that redemptions had been suspended.

‘Very Much So’

Assistant Brooklyn U.S. Attorney James McGovern asked Grain if he would have wanted to know that Cioffi was moving $2 million out of the same Enhanced Fund into another fund which he managed.

“Very much so,” Grain said. “If a manager of a building is running out because there is a fire, I certainly want to be running right alongside him.”

Richard Marin, the former head of Bear Stearns Asset Management, Cioffi and Tannin’s boss, testified today as the first defense witness.

Marin described meeting with Cioffi and Tannin and other top executives on April 24, 2007, to discuss Bear adding $25 million to Cioffi’s fund. He said he felt confident in Cioffi’s plans to stabilize the funds.

“Did you have an understanding of how it was that the funds could be returned to profitability?” Butswinkas asked.

“There were two thoughts,” Marin said. “One was because we had marked down the portfolio and we would start to see some improved levels. In addition, some of the hedges were likely to improve as fundamentals took hold. In general we thought that things were going to get better.”

‘Gaming the System’

Butswinkas asked Marin how large investors send mixed signals, often putting in a request to withdraw their funds and later rescinding the request, using it as a “placeholder” to hedge their bets.

“Sometimes investors, particularly large investors, put in redemption requests, putting in the paperwork, and then ask to withdraw them” Marin testified. “It was their way of gaming the system. We had to watch them vigilantly about gaming the system but it was difficult.”

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 Brooklyn Federal Courthouse at pathurtado@bloomberg.net.