Bear Stearns RIP

Cioffi/Tannin Discovery to Proceed: U.S. Attorney Rebuffed

Two former hedge fund managers, Ralph Cioffi and Matthew Tannin, have won a round in their resistance to enforcement actions both civil and criminal. The U.S. District Court for the eastern district of New York has denied a motion by prosecutors to stay discovery in the civil proceeding pending the completion of the criminal case.

Messrs Cioffi and Tannin managed the Bear Stearns High Grade Structured Credit Strategies Fund from October 2003 until July 2007 -- Mr. Cioffi was the senior portfolio manager, Mr. Tannin as portfolio manager reported to Cioffi. They created a related fund near the end of that period, calling it the Bear Stearns High Grade Structured Credit Strategies Enhanced Fund.

The U.S. Attorney, Benton Campbell, filed indictments against both men on June 18, 2008, alleging securities fraud, conspiracy, and wire fraud. The central charge is that they made fraudulent statements regarding the prospects of these entities. The Securities and Exchange Commission filed a civil action the following day on the same theory.

Mr. Cioffi (but not Mr. Tannin) is also accused of insider trading, because late in March 2007, according to the indictment, he transferred approximately $2 million of the money he had personally invested in one of these funds to another hedge fund.

The arguments over a discovery stay

The U.S. Attorney moved to intervene in the civil action in August, and asked for a stay in the SEC’s action -- and so in the defendants’ ability to conduct discovery in that context -- pending resolution of the criminal charges. His filings claim that this will protect the secrecy of grand jury proceedings and in general “prevent the broad civil discovery available in the Civil Case from circumventing the more limited discovery that will be available to the defendants who have been indicted in the Criminal Case.” The SEC has taken no position on this motion.

Each defendant has retained his own counsel. Mr. Cioffi is represented by Edward J.M. Little of the New York law firm Hughes Hubbard & Reed; Mr. Tannin by Susan Brune of Brune & Richard, also of New York. Both have vigorously opposed the motion for a stay.

Defense counsel argue that such a stay is extraordinary, and that under the applicable precedents the government is required to make a specific showing of how the public’s interests will be prejudiced by the continuance of civil discovery. Mr. Little describes the discussion of prejudice in the government’s memo as consisting only of “a few weak assertions [that] simply parrot the usual, generic, and worn claims of prejudice,” e.g. that the defendants would obtain material in the civil case to which, in the criminal context, they are not entitled.

Further, as Little's brief points out, it was the decision of the United States to bring nearly-simultaneous proceedings in the first case that led to the difficulty under which the government now claims to labor. “The government milked all the advantages of initiating simultaneous proceedings -- holding joint press conferences to laud their dual enforcement efforts -- yet now seeks to evade any of the obligations that come with that choice.”

Ms Brune makes much the same point. “If any party has had an unfair advantage it is the government, which has already obtained extensive discovery, including from Mr. Tannin, for use in the civil and criminal cases. At the crux of the [motion for a stay] is the government’s effort to preclude Mr. Tannin entirely from investigating the facts and from defending himself.”

In a reply brief October 8, Mr. Campbell tried to make the argument that he isn’t obliged to provide a specific accounting of possible harms from civil discovery, because “there is no precedent to deny a stay where the government agrees to provide broad discovery in the criminal case.”

There’s such a precedent now

The court’s decision, filed by Senior Judge Frederic Block October 23, sides firmly with the defendants.

Judge Blank denied the USAO's motion. At the very least, he indicates, it is premature. “Neither defendant has answered the civil complaint and no discovery requests have been proposed. In this context -- or, more accurately, absence of context -- the Court cannot engage in any meaningful balancing of the competing interests at stake.”

He also echoed the arguments of the defense counsel about the deliberate choice of tactic on the government’s part. “Courts are justifiably skeptical of blanket claims of prejudice by the government where -- as here -- the government is responsible for the simultaneous proceedings in the first place.”

Discovery will go forward. The decision to deny a stay is without prejudice to the prosecution’s right to object to particular discovery requests.

Investors in the two Bear Stearns funds were among the early victims of the bursting of the subprime bubble, and Messrs Cioffi and Tannin were the first managers accused of crimes as a consequence. But the nature of their allegedly deceptive behavior is less clear-cut than that of a more typical fraud case, such as that which arose out of the collapse of the Bayou funds in 2005. The government isn’t charging that Cioffi and Tannin, like Samuel Israel and Dan Marino in the Bayou affair, pretended to the investors that the returns were positive when they were in fact negative.

The charge, rather, is that the Bear Stearns defendants misrepresented to investors “the financial prospects of the funds [and] their opinions regarding the financial prospects of the funds.” That sounds a bit slippery.

What is especially worrisome is the government’s reliance upon email conversations between the two defendants in an effort to establish that they weren’t always as cheerful as they let on when communication to investors. A pertinent question has come from Tom Kirkendall, a Houston-area lawyer who maintains a much-read blog on business law, “Do we really want a marketplace in which people are afraid of being candid and analyzing the market with associates for fear of criminal liability?”

Given such questions, every step forward in these twinned enforcement proceedings will come under careful scrutiny.

Spector's Retrial scheduled for October

I haven't been following the legal proceedings with regard to the once-renowned record producer Phil Spector and the death of Lana Clarkson.

I did follow the trial last year, and the more retentive of you may recall that I wrote some posts on it here. The upshot was that the jurors couldn't reach a verdict, and the judge dismissed them last September.

Here's a link to what the BBC had to say about it at the time.

The latest, though, is that after a lot of manuveuring it appears the re-trial will commence in October.

The re-trial is never as much trashy fun as the original.

Jury nullification, part two

The flickering light of my attention fell this week upon the issue of jury nullification because of the conviction of Kirk Wright, not a very sympathetic figure.

Mr. Wright, it seems clear to meas it seemed clear to the jury, was scamming people out of millions of dollars, purporting to run a hedge fund when all he was running was a lavish lifestyle.

It is, of course, legal to solicit money to invest and then to make bad investments and lose that money. It is even legal to compensate yourself handsomely while the suckers stand for it. Caveat emptor. What isn't legal is lying about what you're doing and how well or poorly you're doing it, which is what Wright did. He sent out professional-looking account statements that persuaded his clients that their money was secure and growing.

Then came the inevitable day when some of those clients started receiving their redemptions in rubber checks....

At the two-week trial this month, Wright's attorneys were prepared to offer an "empty chair defense." What's that? In a classic empty-chair defense, Butch Cassidy is arrested. The Sundance Kid either escapes or, perhaps, has turned state's evidence and entered the witness protection program. Since the prosecution has Butch dead to rights on the merits, a lawyer might seek to play to jury sentiment by putting an empty chair at the defense table, and telling the jury dramatically, "that is where the Sundance Kid ought to be sitting."

The tactic is, precisely, a play on sentiment. Jurors often feel that it is unfair to punish Butch if they can't punish Sundance too. The way to relieve that sense of unfairness: acquit Butch!

To make the "empty chair" argument where it is clear that Butch is guilty is to appeal to the jury to nullify the law, because no law requires all possible defendants in the same crime to be brought to trial if any of them are.

Anyway, this was Kirk Wright's attorneys' plan. I don't think they planned literally to put the empty chair there, but they did want to argue to the jury that Wright had accomplices, with responsibility equal to or greater than his own for the production of the phony statements to clients that were the root of his criminal liability.

The prosecution successfully requested what's known as an order in limine, barring defense counsel from making that argument.

Assume the defense has successfully preserved a basis for appeal on this issue, and that they do argue to an appellate court that they should have been permitted to make the empty-chair/nullification appeal.

Does anybody want to play appellate-judge-for-a-day here and render a decision on that point for my benefit?

Jury nullification, part one

Sometimes a jury will violate its instructions. This is simply a fact.

The judge is supposed to instruct the jurors on the law, the jury is supposed to deliberate on the facts of the case and apply those facts to the instructions in order to reach a verdict, but it doesn't always happen that way.

What you'll decide about the rightness or wrongness of this matter depends upon your broader ethical/political principles. You might fear "runaway juries" as sources of chaos. You might believe that if the laws are made by a process you consider legitimate (a democratically-elected legislature) and the judge's instructions on them are accurate, then any independence a jury shows must by definition by illegitimate.

On the other hand, you might think the jurors themselves a more reliable vox populi than that elected legislature. Consider a drug bust. The police officer testifies, "I found a bag of controlled substance X on the body of the suspect." The suspect testifies, "No, the officer planted the X on me -- I'm innocent." This is a classic dispute over fact, not law. The judge instructs the jury, "If you find that the accused had X when he was first approached by the officer, then you must find him guilty."

Inside the jury room, someone may say, "X isn't really a big deal. I've done some X myself." Someone else, "we really don't need to be sending our community's young men away to prison for matters like this." They're not arguing on the factual question nominally submitted to them -- they're arguing for nullification.

As I say: this happens. It is a fact, not a theory. No informed person disputes that. How often does it happen? That's hard to say.

From a policy point of view, one hotly contested question is: should lawyers for the defendant be allowed to ask the jury to nullify? Should the appeal "yes, our client possessed X, but we ask you to acquit anyway," be permitted by officers of the court?

I'll speak more of that, and of the contemporary litigation that brings it to mind, tomorrow.

Hung Jury

New evidence is now in confirming a widely-held hypothesis that southern California's juries will not convict a celebrity.

Yesterday, the jury that had deliberated on whether Phil Spector was guilty of the murder of Lana Clarkson informed Judge Fidler that they couldn't reach a conclusion. It appears that the final vote was 10 for "guilty," two for "not guilty."

The judge declared a mistrial. The prosecution says that it intends to try the case again. Jeopardy doesn't "attach" with a mere mistrial declaration, so double jeopardy isn't an issue. Still, most attorneys who practice criminal law will tell you that it gets harder for the prosecution on a repeat -- it's unlikely the result will be better for them.

There are exceptions, the Alger Hiss case was one of them. Just for the trip down memory lane -- Hiss stole documents from the State Department in 1938. Whittaker Chambers later produced some of them. Hiss and Chambers were part of a single CP cell in the US, funnelling such documents to the Soviets.

By 1948, when the matter became notorious in Congressional hearings, the statute of limitations had expired on any espionage charges. So when Hiss was tried, the following year, the charge was perjury -- the crime was that he had lied before the House committee when he had denied espionage.

The first trial ended in July 1949 with a hung jury. The government retried the case, and Hiss was convicted in January 1950.

One might with some plausibility attribute this difference to a change in the political atmosphere over that half-year. There may have been some sentiment among the first set of jurors that the Soviets were our ally in the recent war, so why is sharing information with them espionage exactly? If so, the sentiment was not in accord with the pertinent law. Unauthorized sharing of secrets even with the friendliest of allies is still espionage. Also, the Soviets weren't allies in 1938. Still, sentiment is always a factor in jury trials.

Perhaps over the second half of 1949 that view was fading, and the Soviets came to be seen less ambiguously as enemies in the new battle for hearts and minds, etc.

Anyway, it is a high-profile example from more than half a century ago and doesn't really affect my assessment of the prosecutions chances in a retial of Phil Spector. Slim and none.

Jury Deliberations

We're now well into the jury deliberations phase of the Phil Spector/Lana Clarkson murder trial.

Outside the hearing of the jury, the judge and attorneys have been in something of an uproar over comments Spector allegedly made to an interviewer for The Mail, a UK publication.

My understanding is that if he gave an interview at all, Spector was in defiance of a gag order. But if you're facing a murder conviction, a citation for contempt of court probably looks like small beer.

What was amazing to me was a scene in which Spector's wife, Rachelle, opened defied the trial judge, essentially daring him to lock her up. Here's a link if any of you would like to read all about it.

http://www.rollingstone.com/rockdaily/index.php/2007/09/11/the-phil-spector-trial-we-watch-court-tv-so-you-dont-have-to-48/

We'll see how long this takes.

Henry Lee

Dr. Henry Lee, Connecticut's favorite son in the world of forensic science, has acquired something of a resume stain in the Phil Spector trial.

Here's a resume of that resume.

Chief Emeritus, Division of Scientific Services
Commissioner, Connecticut Department of Public Safety
Chief Criminalist, State of Connecticut
Director, Connecticut State Police Forensic Science Laboratory
Professor, Forensic Science Program, University of New Haven
Research Scientist, New York University Medical Center
Captain, Taipei Police Headquarters, Taiwan

But Larry Fidler, the presiding judge in the trial of Phil Spector has concluded that Lee hid or destroyed evidence pertinent to Lana Clarkson's death. The judge in that case concluded that Lee hid or destroyed evidence from the scene of an actress's death, evidence that the prosecution contends was potentially damaging to the music producer's case.

Lee, who has testified in the trials of O.J. Simpson and William Kennedy Smith, who has consulted in the matter of JonBenet Ramsey, who has posted an 85 page (85 page!)resume on his web site, is now alleged to have taken something (something small and white -- a piece of a tooth?) from the Spector/Clarkson crime scene.

I understand that the defense still intends to call Lee as an expert witness, and the prosecution will then get to introduce the same evidence that seems to have persuaded Fidler of some wrong-doing on his part, in front of the jury.

Here, by the way, is that 85 page resume's URL. http://www.drhenrylee.com/about/dr_lee_cv_resume.pdf

I doubt that Lee did anything intentionally wrong. But even if he just pocketed something he shouldn't, this could hurt him. Fewer celebrity trial appearance in the future

A Bit of a Tooth

Prosecutors are now charging that one of Phil Spector's former lawyers may have removed evidence from a crime scene.

The defense contends that Lana Clarkson's death was some combination of accident and suicide -- she put the gun in her own mouth and pulled the trigger, perhaps in the belief that it wasn't loaded.

That contention means that "splatter evidence" may be crucial to this trial, so a bit of a tooth found at the crime scene (all accounts are calling it a fingernail-sized piece of tooth) is important in itself even aside from the general principle that any tampering with a crime scene smacks of obstruction of justice.

The allegation -- that Sara Caplan (apparently an experienced and well-regarded attorney) pilfered this bit of tooth -- comes from a law clerk at Caplan's firm. Caplan denies it.

My guess is that Caplan is probably innocent, simply because that just seems such a blatant and high-risk thing for someone in her position to attempt. Why would the clerk say it, then? I don't know. I would presume innocent misunderstanding.

Though I think Caplan innocent, I'm sure her former client is guilty of murder, and I suppose on balance I'm happy the prosecution is taking an aggressive stance.

Rolling out the character witnesses

News reports this weekend tell us that a jury for the upcoming Phil Spector murder trial has been chosen, and speculate about stellar "character witnesses" who may testify for the defense.

Some history, if you will. In the early days of the jury, the days when the Norman conquerors were still trying to get a handle on these odd Anglo-Saxons they were now ruling, the jurors were themselves thought likely to be familiar with the defendant's character and reputation. After all, he probably came from a village where everybody knew everyone -- and they were drawn from the same locale, so his reputation WAS the opinion they held of him.

But as cities large enough so that people didn't necessarily know each other became a common fact on the island, it naturally became increasingly common that a jury would decide the fate of a stranger. Indeed, over time the idea that he OUGHT to be a stranger to them took hold. The jurors shouldn't have any pre-conceived opinion about his reputation, but should be allowed to develop one.

Hence, the character witness, who generally doesn't testify about character, but about "reputation in the community." The jury is allowed (but of course not required) to infer that people who have a good reputation probably got it the right way -- not by fooling everybody but by acting neighborly, repaying debts, etc.

All that said, the institution of a character witness seems in the 21st century to be an institutionalization of pointlessness. What juror will be persuaded to vote to acquit Phil Spector on the basis of the willingness of some other show-business bigshot to say, "yes, he has a high reputation in the community"? I'm afraid there are such jurors, but that means I'm afraid there are people who are so celebrity-blinded as to ignore the obligations of an oath.

Anyway, Phil Spector is playing the game in that hope. His character witnesses may include Yoko Ono and Keith Richards. Neither of whom have anything to contribute to the actual question of how Lana Clarkson died on February 3, 2003. Indeed, even musically the first of those two names brings me up short. Didn't Spector do what Beatles admirers generally think was a really lousy job of producing the one Beatles album he had a shot at? Whatever....

I recently read something amusing on this trial. I've forgotten the source. But someone wrote an article in the form of a letter of encouragement OJ Simpson might write Phil.

"If you're lucky, at some point the prosecutor will hand you the gun you killed Clarkson with. When this happens, be prepared. Be sure to twist your fingers around each other arthritically, act pained, and say, 'I can't reach the trigger.'

"Then you'll just need a cute rhyming phrase that will get into the jury's head and do the rest of the work for you. 'If my hands can't shoot, the case is moot.' Okay, that's pretty lame. But you were in the lyrics business, you can come up with something."

It was a very clever piece, whoever wrote it. Anyway, my one suggestion to the prosecutors: keep Chris Darden miles away.