NOT GUILTY VERDICTS FOR THE BEAR STEARNS MANAGERS

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• In discussing the issue of redemptions, the two defendants failed to state that a major investor had withdrawn; and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

THE SEC WINS A JURY VERDICT IN AN INSIDER TRADING CASE

The SEC prevailed at trial in an insider trading case against Gregory Gunn in SEC v. Tedder, Case No. 3:08-CV-1013 (N.D. Tex. Filed Jun. 17, 2008). The complaint named two insiders as defendants, employees Robert Tedder and Brian Carr, and two individuals alleged to have been tipped by Mr. Tedder, his father Joseph and business associate Philip Gunn, and one allegedly tipped by Philip, his brother Gregory Gunn. Just before trial all of the defendants agreed to settle except Gregory Gunn.

The case centers on the acquisition by The Boeing Company of Aviall, Inc., announced on May 1, 2006. During the time period Messrs. Tedder and Carr were employed at Aviall. Through their employment the two men observed a series of events at the company, the totality of which constituted inside information according to the SEC. Those included:

• An extended trading blackout at the company;

• An executive tour at Aviall by Boeing executives;

• Repeated closed door meetings involving in-house counsel;

• An e-mail inadvertently sent by Availl’s CEO to 122 employees across the company concerning a conference call involving the directors, outside counsel and the financial advisor regarding due diligence; and

• Rumors.

According to the complaint, each of the defendants traded in advance of the deal announcement. As a result Robert Tedder made profits of over $303,000 while Joseph Tedder, Phillip Gunn and Brian Carr, respectively, had profits of over $163,000, $76,000 and $141,000.

Defendant Gregory Gunn was tipped by his brother Phillip in a telephone call in April 2006, according to the SEC. At the time of the telephone call, Gregory was employed at Primerica Financial Services Investments as a registered representative and was the branch manager of the Oklahoma City office. During the telephone conversation, in which another employee of the brokerage participated, Gregory ordered the liquidation of all of his holdings after being tipped by his brother. Shortly thereafter Gregory Gunn purchased approximately $110,000 of Aviall securities, consisting of about $75,000 in common stock and almost $35,000 of Aviall call options. Those positions were liquidated following the announcement of the deal, yielding over $108,000 in profits.
Following a three-day trial, the jury deliberated less than one hour before returning a verdict in favor of the SEC and against Mr. Gunn. See also Litig. Rel. 21286 (Nov. 6, 2009).