Former Bear Stearns hedge fund managers Matthew Tannin and
Ralph Cioffi ran two funds that collapsed in July 2007. Photograph:
Newscast

They are scribblings that may come back to haunt
Matthew Tannin. The former high-flying Bear
Stearns hedge fund manager – who goes on trial for fraud in a New
York court this week – had a habit of recording his inner-most thoughts in
emails sent to himself on a private Google Mail account.

“I am going to use this to keep my diary,” he wrote. “I didn’t want to use my
work email any more.”

In words never intended for public consumption, Tannin wrote of his worries
about becoming dependant on an antidepressant, Wellbutrin, and a stress
medication, Lorazapan, to cope with concern about the performance of his fund.
He expressed satisfaction at earning close to $2m (£1.3m) in a year but alluded
to a “religious crisis” and complained about “schlepping the kids around from
place to place” during a holiday in London.

As his confidence in his money-making panache began to falter, Tannin
pinpointed a meeting in 2006 when he realised that his Bear Stearns fund faced
potential trouble: “I had a wave of fear set over me – that the Fund couldn’t be
run in the way that I was ‘hoping’. And that it was going to subject investors
to ‘blow up risk’.”

Tannin and his boss, Ralph Cioffi, ran two funds
holding $1.4bn of clients’ funds that collapsed in July 2007, an event widely
viewed as the first clear signal of America’s sub-prime mortgage crisis and the
global credit crunch. The meltdown of these funds sparked a chain of events that contributed to the demise of Bear

Stearns, an 85-year-old Wall Street institution, in early 2008. They
have been charged by US prosecutors with defrauding customers by hiding the true
condition of investments as prospects steadily darkened.

The first high-rolling financiers to face criminal
action arising from the financial crisis, Cioffi and Tannin have become
unwitting poster boys for perceived arrogance, recklessness and irresponsibility
on Wall Street. Frustrated at not seeing higher-ranking bank bosses clapped in
irons, the public and the US media are watching keenly.

“I do think there’s a desire on the part of the public to see people held
accountable,” said Barbara Roper, director of investment protection at the
Consumer Federation of America. “The trouble is that a lot of what brought down
the system was legal.”

According to the government, Tannin and Cioffi stuffed their funds with
dangerous mortgage-linked securities while marketing them as low-risk,
high-quality investments. Federal authorities obtained Tannin‘s deleted email
account by serving a subpoena on Google, forcing the company to search its
archives.

Prosecutors say the pair realised at an early stage that things were going
amiss, exchanging messages remarking that conditions had turned “pretty damn
ugly” and that the sub-prime market was “toast”. But they constantly reassured
customers that they were comfortable, that there were buying opportunities and
that there was no cause for alarm. Behind the scenes, the US government contends
that Cioffi’s private concern was such that he withdrew $2m of his own money,
reducing his own “skin in the game”.

The trial, which begins on Tuesday, is expected to last six weeks, with at
least 38 prosecution witnesses and 500 exhibits. Arrested in June last year,
Cioffi and Tannin have had 16 months to prepare their defence. Their lifestyles
have been widely scrutinised – New York magazine recently reported, in an
unsympathetic tone, that Cioffi had been obliged to sell his beachside retreat
in the Hamptons and two of his three Ferraris.

Legal experts say that it will be a tough case for the government to prove.
Few of the facts of what happened are in dispute. But prosecutors must convince
a jury of the defendants’ state of mind by producing evidence of intent to
defraud.

“The government will need every drop of evidence it has to prove intent,”
said Peter Henning, a white-collar law expert at Wayne State University in
Michigan. “These cases are circumstantial. It’s a string of inferences. It’s
about what they knew and when they knew it.”

They may be the first. But Cioffi and Tannin will by no means be the only
financiers to face criminal proceedings arising from the credit crunch. The FBI
has more than 580 corporate fraud investigations underway, of which at least 40
concern sub-prime mortgage lending.

“New York white-collar lawyers are doing quite well right now responding to
grand jury investigations and the threat of grand jury investigations,” said
Daniel Richman, a professor at Columbia Law School. “There’s a sense that quite
a few more are moving down the
pipe.”