In the first criminal trial related to the subprime mortgage meltdown, prosecutors were unable to secure the convictions of Ralph Cioffi and Matthew Tannin when the jury acquitted each defendant on all counts today (coverage here and here). Cioffi and Tannin were managers of two Bear Stearns hedge funds heavily invested in securities backed by subprime mortgages. Those funds collapsed in mid-2007, and investors lost about $1.6 billion. The two faced charges of wire fraud, securities fraud and conspiracy. In addition, Cioffi was charged with insider trading. He withdrew about $2 million of his own money from the hedge funds just prior to the collapse.
Based on coverage of the trial, it appears the prosecution had two major failings in the case. First, the acquittal shows that a trial cannot be won on documents alone. A trial is theater that requires real live witnesses to introduce the documents and tell the jury how the documents fit into the case. Here, the government did not prepare this aspect of their case well enough. For example, take the famous "toast" email. On April 22, 2007, Mr. Tannin, in a message sent from his personal Gmail account to the personal account of Mr. Cioffi’s wife, wrote that “the whole subprime market is toast,” and if the CDO report "is ANYWHERE CLOSE to accurate I think we should close the funds now" and "There is simply no way for us to make money -- ever." A few days later, on an investor conference call, Mr. Tannin assured investors: "we're very comfortable exactly where we are" in the subprime market.
Pretty damning don't you think? However, the prosecution failed to slam the door shut through the testimony of the author of the CDO report referenced in Tannin's email, and the defense, by all accounts (here, here, and here) was better able to use witness testimony to put the email into the context it wanted the jury to understand. The defense brought out on cross-examination of the author that he was actually optimistic about the report, believing that the hedge funds could used increased volatility in the subprime market to make even more money. By allowing this to come out on cross-examination rather than innoculating against it on direct, the prosecution allowed the author's state of mind (positive) to be reflected on to Tannin's state of mind (negative).
Of course, it is Tannin's state of mind that was critical at the time he made the statements to investors. If he believed that the hedge funds were in trouble at the time he made the positive statements to investors, he should have been convicted. By failing to cement in the context on the "toast" email the prosecution allowed the defense to put its own context on the email and the case -- the future is uncertain, the defendants did not know where the subprime market was going, so they simply could not have had the intent to commit fraud.
The prosecution's case was also hurt by something that happened long before the case ever went to trial. During the middle of the trial, the district judge prevented the prosecution from introducing another smoking gun email because it found the government's subpoena to get email from Tannin's Google email account violated the 4th Amendment (article here). In the November 2006 email (again using a non-work account), Tannin wrote “I became very worried very quickly.... Credit is only deteriorating. I was worried that this would all end badly and that I would have to look for work.” Tannin went further stating the funds, under a more extreme situation could "blow up." Another lesson for criminal and civil litigators alike. Mistakes or carelessness in carrying out tasks early in the case can be compounded and magnified at trial.
In the end, the government's loss is significant for future prosecutions and may chill new criminal cases from being brought. Given the climate amongst the general public following the financial crisis and the so-called Wall Street bailouts, one would have thought that juries would just be waiting to convict somebody, anybody, for the fallout everybody has felt from the subprime bubble bursting. In the end, the defendants got a fair shake, and the defendants' lawyers apparently did a better job of putting the emails and other documents in context through the testimony of live witnesses.
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