Prosecutors will argue that Ralph Cioffi and Matthew Tannin, managers of two hedge funds whose failures in 2007 – sparked by plummeting subprime mortgage values – spelled the beginning of the end for Bear Stearns, knowingly misled investors about the funds' health.
Cioffi and Tannin have both pleaded not guilty to the eight fraud counts against them. If convicted, they could spend up to 20 years in prison – the first executives facing that threat.
According to the Wall Street Journal ($), the trial will test "the degree to which Wall Street should disclose bad news to investors."
Prosecutors intend to use private communications between the two men – often in contradiction to public statements to investors - to show active deception.
In one instance, the 53-year-old Tannin said he was "comfortable" with the funds' performance during a 2007 conference call. But days before, he sent Cioffi, 47, an e-mail warning that if a pessimistic internal report was "ANYWHERE CLOSE to accurate, I think we should close the fund now," according to the Journal.
In another, Cioffi allegedly lied during the same conference call when he said investors had only requested to withdraw "couple of million" dollars from the fund when just one, Concord Management, had asked to pull out its $57 million investment.
Cioffi, who also faces insider trading charges, and Tannin will argue that they were simply victims of the subprime mortgage crisis and their statements expressing confidence were taken out of context, according to the report.
Jury selection was set to begin Tuesday, with opening statements expected later in the week.