Jury Selection Begins in Trial of Hedge Fund Managers

Jack Mirkinson

The prospective jurors had filled out their questionnaires and now the judge presiding in the trial of the two hedge fund managers charged with fraud wanted to know whether the men and women who might sit in judgment had a dim view of Wall Street.

More than a few did.

Jury selection began today in a Brooklyn courthouse in the trial of the first Wall Street executives charged with crimes stemming from the financial crisis. Federal prosecutors have charged Ralph Cioffi and Matthew Tannin with intentionally misleading investors about the state of two hedge funds they ran for Bear Stearns, the investment bank whose collapse in March of last year was an opening salvo in the economic meltdown. Many have said that it was the collapse of the funds that sent Bear and, eventually, the entire subprime market into a tailspin. Cioffi and Tannin are charged with conspiracy, securities fraud and wire fraud and each faces up to 20 years in prison.

The two men were archetypes of the financial bubble that burst last year. They ran obscure hedge funds that netted billions of dollars and made them very wealthy in the process. Cioffi bought a house in the Hamptons and three Ferraris.

But, the government charges, the two were privately expressing serious doubts about the health of the funds. A key piece of government evidence is emails Cioffi and Tannin sent to each other and to themselves. On Sunday, prosecutors released a diary entry showing that Tannin had begun taking sleeping pills as early as 2006 because of the strain brought on by the hedge fund’s problems.  “The entire subprime market is toast,” he wrote to himself in 2007. Three days later, he told investors that the firm was “very comfortable with where we are.” Such contradictory statements are at the heart of the prosecution’s case. But the government must prove that Cioffi and Tannin were making a sustained effort to deceive their investors, and not just putting a good spin on bad news.

The trial, at the United States District Court for the Eastern District of New York, started with a bang. U.S. District Court Judge Frederic Block shot down the prosecution’s attempts to include the defendants’ deletion of the emails as part of their effort to prove that Cioffi and Tannin intended to mislead investors. Block, who ruled against the government in the matter last week, told James McGovern, lead attorney for the government, to sit down, adding, “ridiculous.”

The defendants, meanwhile, remained nearly motionless, flanked by their attorneys. Tannin did stand and smile at the potential jurors when he was introduced. Cioffi did not acknowledge them.

For nearly five hours, Block bantered with each prospective juror, trying to determine whether he or she could serve impartially. All had been required to fill out a lengthy questionnaire that asked them to list everything from their hobbies to whether they or anyone they knew had been affected by the collapse of the economy. Block used the questionnaires as a kind of crib sheet, asking people about their jobs, their families and what kinds of books and magazines they read.

The revelations did not stop at the prospective jurors. Block revealed that, among other things, he worries about the health of the New York Times, enjoys watching “House” on television from time to time, loves the gospel singer Blind Lemon Jefferson—a “profound guy,” he told a woman who said she sings gospel in church. After one would-be juror told him she enjoyed dancing, Block recommended “Tanguera,” a dance show playing at the City Center in Manhattan. “The most spectacular dancing I’ve ever seen,” he said.

Yet the wreckage caused by the financial crisis could be felt throughout the proceedings. Block warned jurors not to use this case as a proxy fight against Wall Street, which many feel has not been held accountable for its role in the financial crisis. He noted that two prospective jurors had been rejected even before the hearing began because of things they had written in the questionnaire. One person, he said, had written that he could not be impartial because of the way financial institutions “bend the rules.” Another had lost money with Bear Stearns. During questioning many talked about money they had lost in the stock market or their retirement accounts. Some said they could not give the defendants a fair hearing because of the state of the economy. “I favor the government…because of what happens on Wall Street,” one man told Block, who promptly excused him.

Opening arguments in the case are expected to begin later this week.