Legal News

Key Evidentiary Matters Hovering Over Bear Stearns Criminal Case

By Ashby Jones

It was just an evidentiary hearing in the Bear Stearns criminal case, but as far as evidentiary hearings go, it was big.

Federal prosecutors on Thursday asked a federal judge in Brooklyn, Frederic Block, to hold off on making a ruling over whether certain evidence can be admitted until they can provide the judge with a few more facts. But the gist of what the prosecutors want is this: to be able to put on evidence at trial that former Bear Stearns fund manager Ralph Cioffi pledged all of his personal holdings in a Bear Stearns fund as collateral for building loan. The prosecutors believe the alleged pledge — and the subsequent loss of the loan and collateral — go to motive. That is, prosecutors say, they help explain why Cioffi allegedly needed to commit securities fraud — in order to keep the fund from collapsing.

In a letter dated Wednesday, prosecutors from the U.S. attorney’s office in Brooklyn said Cioffi asked Bear to let him pledge his interest as collateral, but Bear executives wouldn’t let him because it would have to be disclosed to investors. Cioffi was “enraged over the denial,” prosecutors allege, but that Cioffi did so anyway. “Certainly the potentially devastating ramifications of losing both his income stream and the collateral securing his $4.25 million loan provided strong motivation to defraud investors and keep them from redeeming the funds,” prosecutors wrote.

The Bear funds’ problems startled Wall Street in 2007 when it was disclosed that the firm was scrambling to sell large amounts of mortgage securities in the hedge funds run by Cioffi. The problems experienced with subprime mortgages quickly enveloped the funds and contributed to Bear’s demise.

At a hearing Thursday, Williams & Connolly’s Dane Butswinkas, a lawyer for Cioffi, said prosecutors “will be surprised” when he learns what the facts surrounding the loan are. Butswinkas declined to comment further after the hearing.

Cioffi and co-defendant Matthew Tannin (pictured), former managers of two high-profile bond portfolios in Bear Stearns’s asset-management unit, have been charged with conspiracy, securities fraud and wire fraud. Mr. Cioffi also has been charged with insider trading. They have denied wrongdoing.

At the hearing, Judge Block didn’t issue a ruling on the whether prosecutors will be allowed to discuss conduct that wasn’t criminally charged, such as Cioffi’s alleged actions related to the loan. “I think it’s a stretch,” the judge said, but he agreed to give prosecutors more time.

The judge also declined to rule on separate motions by the defense to preclude prosecutors from introducing evidence that a tablet PC used by Tannin and a trading notebook used by Cioffi have disappeared.

During the Thursday hearings, prosecutors also said the government received a letter from Google in response to their inquiries indicating that Tannin’s gmail account was erased in March 2008 at a time when there was a standing order in a separate 2007 civil case by the U.S. Securities and Exchange Commission not to destroy documents.

During the hearing, Susan Brune, a lawyer for Tannin, said the Google letter hadn’t been given to her by the government and it was the first time she was hearing about it.

Correction: An earlier version of this post incorrectly stated that Block is seated in Manhattan.

Full post as published by Law Blog - WSJ.com on September 18, 2009 (boomark / email).