The Bear Goes Free

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The nasty juggernaut known as the U.S. Department of Justice usually gets it man, regardless of whether or not the man targeted has committed any crimes. Armed with weapons that might even have pricked the conscience of Josef Stalin, federal prosecutors have been on a rampage ever since the economy melted down, as the government seeks to blame business people for the problems caused by the government and its inflation machine known as the Federal Reserve System.

However, every once in a while, there is good news to report, and on Tuesday afternoon, the government’s lousy case against former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin was deep-sixed by a jury that could recognize the prosecutors’ dearth of evidence. I don’t have much confidence in federal juries, and I am sure that I never would be permitted to serve on one (Oh, joy), but on this day, a federal jury in Brooklyn did its job and did it well.

When I first wrote about this case last year, I figured that Cioffi and Tannin would be railroaded into the nearest federal prison. My years in writing about the Abomination Formerly Known as the U.S. Department of Justice (sic) have left me jaded, as I have watched innocent people be tossed into the hell called the U.S. Bureau of Prisons.

However, I did not count on a few things. First, and most important, Cioffi and Tannin had the personalities that would allow them to fight back. Not every person is equipped to go to trial and survive; these men could do it, and they did it beautifully.

Second, they had a legal team that shot down everything that the federal prosecutors threw at them. Third, Judge Frederic Block could smell the dishonesty of the government’s case and he was not afraid to do his job. Unlike most federal judges, Block did not see himself as being an arm of the prosecution, and that made a huge difference in the trial.

Fourth, the government had no case. NO case. The prosecution based their entire case upon snippets of emails that the defendants had sent in which they appeared worried about the state of their hedge funds, which were based upon mortgage securities that soon would have the same value as Confederate money in 1866. In fact, just before the trial began, prosecutors dumped a number of these supposedly damning email snippets in the media to make it look as though they had a legitimate case.

However, once the emails were shown in their entirety, their damning nature disappeared. I closely followed this case and had a sense of where it was headed. (Interestingly, most of the media chose to present a rosy picture of the government’s case, and at the breaks, reporters were seen laughing and joking with the prosecutors.) Only the prosecution’s side was presented in most news broadcasts and stories, although a freelancer writing some pieces for the New York Times did manage to violate his newspaper’s pro-prosecution of business people policy and write articles like this in which he noted many of the government’s weaknesses. (He did fail to point out — as did all of the reporters — that one prosecution witness openly rebelled against prosecutors and told them in no uncertain terms that he had withdrawn a statement to prosecutors he had made earlier after he found out the context of a certain action by Cioffi. In this situation, prosecutors found themselves forced to cross-examine their own witness.)

One of the worst offenders in the media was Forbes, which was a subject for something I recently wrote about how the media covers these government inquisitions. Forbes and CNBC were especially terrible in their coverage, using the execrable Jacob Zamansky as their correspondent of the trial, despite the fact that Zamansky had a huge financial interest in the men being found guilty.

Zamansky’s coverage of the opening day was especially dishonest, and it contradicted what observers in the courtroom knew to be true. For example, Zamansky wrote:

My own view is that the government did an excellent job of keeping the case simple and focused, stressing that “the defendants are not on trial because the hedge funds collapsed or because of the market meltdown. The defendants are on trial because they lied to investors.”

The defense, on the other hand, chose to educate the jury on hedge funds, leverage and CDOs. Their strategy appears to be to blame their clients’ behavior on the fog of war.

We saw similar strategies in the Enron trial. In that case, prosecutors kept it simple by pounding home the idea that former bosses Ken Lay and Jeffrey Skilling lied to investors; the defense focused on off-balance sheet partnerships and other financial complexities.

What you have just read was a lie. A big lie. A whopper. The government already was on its heels at the opening statements. Prosecutors had their narrative, and like the band in "Animal House" that tried to march through a wall, they stuck to it no matter how many times the defense tore holes in that argument. Given the government’s strategy, a flock of parrots could have made the same presentation.

Most people are going to be shocked at the acquittal precisely because people like Zamansky were feeding them the line that the government had a powerful case and prosecutors were as skillful in presenting their "mountain of evidence" as Itzhak Perlman plays the Suite from "Carmen" on his violin. In reality, the government’s case was about as skillfully presented as my attempts to play the Carmen Suite on a violin. (No one confuses my playing with that of Perlman.)

The fact that the defense was eviscerating the "they lied to investors" from the opening arguments was ignored by most of the pro-prosecution press. However, the biggest howler came from prosecutors Ilene Jaroslaw and Patrick Sinclair, who made off-the-record remarks that the Brooklyn jury was too unsophisticated to understand the intricacies of the case.

This is amazing, simply amazing. First, and most important, the last thing that Jaroslaw and Sinclair wanted was for their presentation to be eye-glazing and they were hoping that the defense would present the argument that securities markets were very complicated and maybe jurors should not try to figure out what constituted a crime and what was not a crime. Zamansky’s quote above was accurate in that the prosecution’s strategy all along was to paint Cioffi and Tannin as liars. (What Zamansky did not do was to demonstrate accurately just how the defense took apart one of the "simple" arguments in its opening statements, using clear language that even a reporter from Forbes should have been able to understand.)

Second, the reason that the trial was held in Brooklyn instead of Manhattan was because the court-shopping prosecutors wanted a Brooklyn jury, reasoning that a jury of working-class people would not be able to relate to a couple of once-wealthy Wall Street traders. Jaroslaw and Sinclair purposely wanted what they believed would be an "unsophisticated" jury that would not understand the information the defense was going to present. Thus, to claim that the jury’s alleged "stupidity" was the reason that they lost is the ultimate proof that federal prosecutors are an arrogant lot.

After the trial, off-the-record interviews with prosecutors yielded such arrogance:

But some inside the US attorney’s office think the case was handled perfectly well. The real problem was that the jury just never understood the case. In interviews with jurors after the case, the prosecutors learned that the jury seemed unaware that they had presented clear evidence of certain facts.

“It is frustrating to lose a case not because the jury disagrees with your evidence but because they just aren’t able to follow anything,” one person familiar with the thinking in the office said.

However, interviews with jurors afterward yielded something quite different than a bunch of rubes that did not deserve to be in the presence of the majesty of the feds. Indeed, jurors looked at everything, from every alleged damning email to the question of whether or not the trial should have been in Brooklyn in the first place, given both men worked in Manhattan.

The jurors asked each other what was the context of each of those emails, refusing to cherry-pick one or two lines, as the prosecution was doing. The following provides an excellent example of what jurors actually did, as opposed to what prosecutors claimed:

One of the main documents in the case was an e-mail message that Mr. Tannin sent from his private G-mail account to the e-mail account of Mr. Cioffi’s wife. He wrote that the subprime market — the market to which the funds were tied — "looked pretty damn ugly," and that if a recent report was correct, "then the entire subprime market is toast." Days later, during a conference call, Mr. Tannin told investors that "we’re very comfortable with exactly where we are."

When the defense asked that the entire e-mail be read before the jury, a different picture emerged, according to a juror, Aram Hong, the director for food and beverage at a hotel. The complete e-mail, said Ms. Hong, suggested that the defendants were considering two options. The first was to close the funds, and the other was to approach the flagging subprime mortgage market as a buying opportunity. "They decided, u2018We need to make a decision now. And we need to be aggressive whichever way we go,’"Ms. Hong said.

Defense lawyers argued much the same throughout the trial.

"The entire market crashed," Ms. Hong said. "You can’t blame that on two people."

If anything, the slanderous and dishonest post-acquittal remarks by prosecutors drive home just how contemptuous federal prosecutors are of everyone else. The jury did not acquit because they were too stupid and vapid to understand the clarity of the prosecution’s case; they acquitted because they did understand that the government’s simple, clear presentation was not true, or, at very best, did not do a good job of meeting the "reasonable doubt" standards.

I was not surprised at the acquittal, given what I knew was presented in court. My only fear was a federal jury being, well, a federal jury that throws sops to those poor, underpaid prosecutors who claim they only are trying to do justice.

In the end, however, the jury did its job, and judge did his job, the defendants were innocent, and the prosecution continued to lie. Oh, and the media will continue to be the media. Like the Bourbons, they "learn nothing and they forget nothing."

November 12, 2009

William L. Anderson, Ph.D. [send him mail], teaches economics at Frostburg State University in Maryland, and is an adjunct scholar of the Ludwig von Mises Institute. He also is a consultant with American Economic Services. Visit his blog.

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