Prosecutor cites Cioffi "lies" in closing arguments

Nov 06, 2009 (The Record - McClatchy-Tribune Information Services via COMTEX) -- BSC | Quote | Chart | News | PowerRating -- Former Bear Stearns hedge fund manager Ralph Cioffi and a subordinate repeatedly defrauded investors with a slew of "black and white lies" to stop them removing their money from two hedge funds headed for collapse, prosecutors argued Thursday.

"They acted like masters of the universe who thought the rules simply did not apply to them," said Assistant U.S. Attorney Ilene Jaroslaw, of Cioffi, and his chief operating officer, Matthew Tannin, in closing arguments in the pair's criminal trial in U.S. District Court in Brooklyn. "The way they conducted themselves was not only shameful, it was unlawful."

But an attorney for Cioffi, of Tenafly, urged the jury to look closely at the government's case, saying it was constructed on deliberate misinterpretations of evidence and "sound bites."

"When you look the world through dirty glasses, things look dirty," said attorney Dane H. Butswinkas. "If you start with the assumption that something is sinister, it will be."

Cioffi, 53, former senior portfolio manager, and Tannin, 48, of New York, face charges of conspiracy, securities fraud and wire fraud in connection with two hedge funds they managed.

Cioffi also is charged with insider trading for allegedly using non-public information in his decision to withdraw $2 million from one of the funds, which were heavily invested in sub-prime mortgage-backed securities.

The trial is the biggest to come out of a U.S. probe into the sub-prime implosion that wreaked havoc on the financial services industry and the economy.

At issue in the four-week-old trial is Cioffi and Tannin's behavior from March to June 2007, as the funds sank and ultimately collapsed, costing investors $1.6 billion.

"The trial is not about hedge fund strategy," Jaroslaw said. "And it's not about the hows and whys of the market in 2007 ... What this trial is about is the two defendants lying to their investors."

Jaroslaw, in a three hour speech, pointed to notes taken by Jason Bunin, a personal assistant at Bear Stearns, in a meeting he and his boss, Shelley Bergman, had with Tannin and Cioffi on May 8.

Bunin and Bergman testified that Cioffi told them he had $5.5 million in one of the funds, and said the amount of investor withdrawals from the funds was "nothing significant." That contradicted the testimony of other witnesses who said that Cioffi had by then already removed $2 million from the fund, and that a big investor was withdrawing $57 million.

"There is simply no way to explain this away," Jaroslaw said of Cioffi's statements. "It's a black and white lie that the defendants intended for Mr. Bergman and Bunin to give them comfort that all was well with the fund."

She said the lie was one of many false statements by Cioffi and Tannin about how much money they had in the funds, and the number of redemptions made by investors as the funds fell.

Those issues are key to investors, prosecutors said, because they provide an indication of how healthy the managers and investors regard the funds.

Prosecutors say Cioffi deliberately concealed his withdrawal from investors to avoid spreading concern, and that he and Tannin conspired to keep it secret.

Jaroslaw said Cioffi needed to move the $2 million from the failing fund to protect its value, which he posted as collateral for a $4.25 million construction loan on a Florida condominium project.

Because Cioffi had taken out earlier loans on the same project, if the hedge fund failed and the collateral's value fell to zero, Cioffi was "on the hook for $30 million," Jaroslaw said.

Butwsinkas, however, told the jury that the government's argument was undercut by the fact that although the funds collapsed, Cioffi paid off the loan in full.

"The fact is this loan was overcollateralized," said Butswinkas, noting that during testimony, Thomas W. Scharlau, a former vice-president at the bank, called Cioffi a "triple-A rated man."

Butswinkas said that Cioffi, in moving the $2 million from one fund to another, went through the proper Bear Stearns procedure, and that the move was widely known among his superiors. Moreover, the attorney said, investors were told that fund managers could move their money at any time without informing investors.

"Wouldn't it be a colossal unfairness if, having done all of those things, we decide, nevertheless there is a criminal legal violation?" Butswinkas said.

Butwsinkas pointed to an email highlighted by the prosecutors as evidence of how they twisted the facts.

In the email, Cioffi said, "I'm fearful of these markets," adding that Tannin "said it's either a meltdown or the greatest buying opportunity ever. I'm leaning towards the former."

Butswinkas noted that the email was one of several in an exchange between Cioffi and a Bear Stearns economist, in which the two agreed by the end that Cioffi had a strategy that could help the funds "weather the storm."

"Why didn't the government show you the email chain?" the attorney said. "Because the government is giving you misimpressions, and misimpressions give you pause."

Butswinkas' closing argument was to continue Friday.

E-mail: morley@northjersey.com

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