The government suffered a significant loss yesterday when a jury in the Eastern District of New York returned not guilty verdicts on all counts in the trial of former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin. U.S. v. Cioffi, Case No. 1:08-cr-00415 (E.D.N.Y. Filed June 18, 2008). The case has been billed as the first major market crisis action to proceed to trial. The parallel civil case filed by the SEC is still pending. SEC v. Cioffi, Case No. 08-2457 (E.D.N.Y. Filed June 19, 2008).

The rejection of the government’s case by what many described as a “blue collar” jury strongly suggests that the government reassess the line of demarcation between criminal and non-criminal conduct in the charging process for business cases. The indictment against Messrs. Cioffi and Tannin alleged one count of conspiracy to commit securities and wire fraud, one count of securities fraud with respect to each of the two hedge funds involved, insider trading as to Mr. Cioffi, and four counts of wire fraud. These charges centered on what the government claimed was a fraud in which the two defendants realized the funds they managed were in grave financial condition and at risk of collapse, but concealed this from investors and lenders.

The building blocks of the fraud were supposed to be misrepresentations and omissions by Messrs. Cioffi and Tannin to investors and others which included the facts that:

• Beginning in March 2007 Mr. Cioffi moved about one-third of his $6 million investment out to another investment without disclosing this fact to investors who considered his position material to their investment decisions;

• Although the two men recognized that the funds could collapse, and discussed changing the investment strategy or closing the funds following the receipt of a report stating that certain assets were over valued, these facts were not disclosed;

• During investor calls the two defendants stated they were “very comfortable with exactly where we are . . .,” in contrast to their actual dark views about the funds;

• In discussing the issue of redemptions, the two defendants failed to state that a major investor had withdrawn; and

• In May 2007, as the funds were collapsing, the two men continued to misrepresent their financial condition.

Jurors were not convinced. They reportedly only deliberated a few hours before rejecting all of the government’s claims.

The quick rejection of the government’s case suggests overreaching in the charging process. Prosecutors have extremely wide latitude in bringing criminal charges. In exercising that authority it is critical that the government not overreach and criminalize conduct which, at best, may be on the margin. This is particularly true in view of the harmful impact such accusations have on an individual. Indeed, the harm from those allegations never truly dissipates, even in the wake of a not guilty verdict. The verdict here suggests that the government should reassess where it draws the line in the future.