An obscure U.S. attorney brings the subprime mortgage saga into its criminal phase.

Commentary about business and finance.
June 19 2008 4:42 PM

Meet Bear Stearns' Prosecutor

A relatively obscure U.S. attorney brings the subprime mortgage saga into a new, criminal phase.

Read more about Wall Street's ongoing crisis.

Benton J. Campbell
Benton J. Campbell

Two men were indicted in New York today on charges that they knew financial disaster was coming but acted as if they'd never gotten the memo. Ralph Cioffi and Matthew Tannin both worked for Bear Stearns, the company that suffered a stunning collapse earlier this year and shoved the phrase "credit crisis" onto the national stage. The failure of Cioffi and Tannin's hedge funds cost investors nearly $2 billion and set off a series of events that climaxed with the fall of Bear Stearns.

But even if hundreds of billions of dollars in wealth have evaporated, today's indictment marks the first time that criminal activity has been formally alleged, raising the possibility that the credit crisis will—like the Enron and MCI debacles earlier this decade—also see once-high-flying executives landing in jail. It might also create a national profile for Benton Campbell, a boyish U.S. attorney once nicknamed "Dangerous Opie."

What's behind the case? Cioffi and Tannin were hedge-fund managers who relied mainly on mortgage-backed securities to keep the money flowing. Once homeowners stopped paying their mortgages, Cioffi and Tannin's house of cards folded. But they're not being charged with eight counts of securities fraud, conspiracy, and wire fraud just because their funds imploded; they're being charged because they didn't prevent disaster or warn others, even though they may have seen it coming.

The feds claim both men knowingly misrepresented the health of their funds to investors and lenders "in the ultimately futile hope that the Funds' bleak prospects would change and that their incomes and reputations would remain intact." The indictment (PDF) carries heavy accusations that both Cioffi and Tannin thought one thing and said another to investors.

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Both Cioffi and Tannin were concerned in March 2007 that their funds were headed to the garbage heap. February was so abysmal that Cioffi led a vodka toast with colleagues to celebrate surviving the month. In March, Cioffi continued to bring investors into the fund despite telling colleagues he was "sick to my stomach over our performance in [M]arch." Late in the month, Cioffi removed $2 million of his own money from one of the funds—something he never told the fund's investors. (This withdrawal earned Cioffi an extra charge of insider trading.)

Most damning to Tannin, perhaps, is an e-mail he sent to Cioffi via Cioffi's wife's personal e-mail address on April 22, 2007, saying that "the subprime market looks pretty damn ugly," which could eventually mean "there is simply no way for us to make money—ever." Cioffi and Tannin reportedly had a powwow that night, and three days later, both were all smiles at a conference call with investors. In June, the funds died meaningful deaths—they were the first warning signs that all was not right at Bear Stearns.

The four days between Tannin's e-mail and the investor conference call could be a key plot point. If Tannin really believed what he told investors on the call—that the funds were going to be fine—then the defense would need to show that Tannin misread the markets on April 22 and had legitimately changed his mind by April 25, presumably with Cioffi's help. It's a Wall Street adaptation of the Chicken Little conundrum. Tannin said privately that the sky is falling, yet four days later he publicly said that the sky wasn't going anywhere. Is that illegal, even if he changed his mind? And did Cioffi know the sky was falling, too, but not say anything about it? His $2 million withdrawal could be the telltale sign.

Cioffi and Tannin say they're innocent and, just like everybody else on Wall Street, victims of an unexpected market collapse. Their lawyers say they're being scapegoated because the government wants to hold somebody accountable for the meltdown. Their defense will rely on the volatility of the markets and that nobody, not even highly paid experts, knew with any certainty what was going on with subprime mortgages. Typically, CNBC's impulse has been to defend bankers; today it's been labeling the story "Witch Hunt on Wall St.?" in on-air graphics.

Trying to prove Cioffi and Tannin guilty are a group of prosecutors led by the pale, wispy, relatively unknown interim U.S. attorney Campbell. He has climbed the U.S. attorney promotions ladder for more than a dozen years, working his way up via leadership roles in the Violent Criminal Enterprises unit, the Criminal Division, and the government's Enron Task Force.

Campbell's time on the Enron case is intriguing because of its (imperfect) parallels to the Bear Stearns case. Andrew Weissmann, the director of the task force, told me he picked Campbell because his skills are very unusual for a prosecutor—namely, he's actually a pleasant guy. Describing him as nice, quiet, and reserved, Weissmann suggested that Campbell's unimposing personality makes his "tenacious," "fearless," and "hard-charging" courtroom demeanor all the more effective.

Along with two other attorneys, Campbell prosecuted five executives who ran Enron's tainted broadband Internet arm a few years ago. The case didn't turn out as Campbell hoped. The lawsuit was messy; prosecutors were trying to prove 192 different charges spread out over five different executives. The trial lasted three months, and in the end Campbell and the prosecution team didn't nab a single conviction. The jurors—who had regularly fallen asleep because the trial was so complex (and boring)—said they were deadlocked, and the judge declared a mistrial. (Eventually, one of the executives was found guilty in a subsequent retrial, but that conviction was then overturned by an appeals court.) *

The prosecution, including Campbell, committed a key blunder when it showed a videotape in court that implied Enron had lied to investors, when the video was never actually shown to investors. Rather than fess up and acknowledge they made a mistake, the prosecution tried to sweep it under the rug. The videotape gaffe combined with the overwhelming number of charges on the docket may have doomed the case.

A reporter who covered the Enron broadband case told me that in the courtroom Campbell's questioning lacked passion and was plodding and dull, but he was well-prepared and meticulous with his work. Campbell, though, probably won't make it into the courtroom—assistant U.S. attorneys will most likely argue the case instead.

Most importantly, perhaps, is the reality that Campbell already has experience working on a high-profile case that—rightly or not—comes to symbolize an economic epoch. Weissmann told me that Campbell's past on the Enron beat should have provided him experience dealing with the press. Judging by the steady coverage of today's indictment on mainstream cable news outlets, he'll need it.

Correction, June 20, 2008: The article originally misstated that more than one of the Enron Broadband executives was convicted in retrials. Only one of the executives was convicted in a subsequent trial, but the conviction did not stand. An appeals court later threw out the verdict. (Return  to the corrected sentence.)