Thursday, June 19, 2008

Deal or No Deal - The Bear Stearns Duo

A big indictment was handed down yesterday in the Bear Stearns matter against former hedge fund managers Ralph Cioffi and Matthew Tannin. The major issue in the case is whether they misled investors about the strength and performance of two portfolios that eventually collapsed.

For purposes of The Plea Bargaining Blog, we have to ask the inevitable question - Will they take a plea deal or risk going to trial in a well publicized financial crimes case? While initial reports regarding the indictment indicated the case was weak, the actual indictment contains a wealth of information regarding specific conduct the government will offer to demonstrate the fund managers purposefully mislead investors. With what appears to be a strong case for the U.S. Attorney's Office, what could Cioffi and Tannin offer in return for the government's leniency? The natural answer in these types of cases is typically the ability to use the testimony of the bargaining defendant against someone higher in the corporation, just as occurred in the Enron matter. But the indictment here indicates Cioffi and Tannin are as high as this alleged fraud goes at Bear Stearns. In fact, the indictment specifically states that "Tannin and Cioffi never disclosed the gravity of the Funds' problems to investors or more senior BSAM personnel." With little in the way to offer the government regarding others, this case is likely to go in one of two ways.

First, both defendants might simply take their chances at trial. With a possible $1.4 billion loss figure in the case (the total amount lost by the funds), any prison sentence would be staggering even if a plea deal was accepted and a reduction was given for acceptance of responsibility under the Federal Sentencing Guidelines. Where the potential sentence resulting from a plea agreement is not significantly lower than that faced at trial, defendants rarely accept the plea offer.

Alternatively, there may be a race to the courthouse. If one defendant agrees to flip on the other, the rewards may be more significant, and, therefore, worthy of acceptance. Of course, that these funds were under investigation by the federal government is nothing new. Therefore, if either Tannin or Cioffi wanted to deal, they likely would have already made such a move.

As a result, it appears there is a strong chance we may have another great American trial in the E.D.N.Y. This will certainly be one to watch.

See the indictment in the Bear Stearns matter here:
http://online.wsj.com/public/resources/documents/bearindictment.pdf

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