The swift acquittal of two Bear Stearns executives in the government's criminal case tied to the financial meltdown likely will force prosecutors to rethink the evidence they planned to present in a raft of cases that have yet to go to trial, legal experts say.
Criminal cases may be percolating against executives at fallen mortgage lender Countrywide Financial Corp. and bailed-out insurance giant American International Group Inc., among others. The Bear Stearns acquittals show how tough it can be to prove that bank executives committed fraud by lying to investors.
The government must show that executives were actually committing fraud and not simply doing their best to manage the worst financial crisis in decades, said Michael Levy, a white-collar defense attorney at Bingham McCutchen in Washington. Jurors were not swayed by e-mails the government presented in the Bear Stearns case.
Fraud is "a very difficult theory for the government to prevail on in the context of an unprecedented financial crisis," Levy said.
Federal prosecutors and the Securities and Exchange Commission have launched wide-ranging investigations of companies across the financial services industry. But a year after the crisis struck, charges haven't yet come in most of the probes. The investigations also are targeting government-owned mortgage financers Fannie Mae and Freddie Mac and crisis casualty Lehman Brothers.
The Bear Stearns case was the second case to go to trial, following the conviction in August of a former Credit Suisse broker on conspiracy and securities fraud charges in connection with a $1 billion subprime mortgage fraud.
That's a sharp contrast to the 2002 corporate accounting scandals that engulfed Enron, WorldCom and other companies. Back then, "perp walks" seemed to occur almost daily, and news conferences brought announcements of charges against a series of executives and high-profile individuals.
Tuesday's not-guilty verdict dealt a setback to the Justice Department. It "will cause prosecutors to rethink any future cases related to the financial meltdown," said Robert Mintz, a former federal prosecutor who is a private defense attorney.
The Justice Department "remains committed to following the facts and the evidence where they lead," spokeswoman Laura Sweeney said Wednesday. "If we believe the actions of individuals or companies were criminal, we will pursue those cases aggressively."
The two Bear Stearns executives, Ralph Cioffi and Matthew Tannin, ran hedge funds that collapsed after betting heavily on the shaky subprime mortgage market. The jurors in federal court in Brooklyn, N.Y., acquitted the pair of conspiracy and other charges in an alleged scheme that cost investors about $1.6 billion.
The jurors said they decided that e-mail evidence presented against Cioffi and Tannin was contradictory and taken out of context and that the executives were blamed for a market cataclysm beyond their control.
The e-mails written by the two showed anxiety over the slide in the subprime market and what it could do to the hedge funds' investments. Jurors said they didn't prove intent to deceive investors.
In a panicky situation where circumstances shifted by the hour or minute, the e-mails could have conveyed "mixed messages" to a jury, Mintz said. In future cases, prosecutors will have to take care to present "clear and unambiguous evidence of wrongdoing and concealment," he added.
The SEC, for its part, sued the two Bear Stearns executives in a civil action last spring. That case is expected to proceed.
"We of course respect the criminal verdict. But at this time we expect to go forward with litigating our civil action," SEC spokesman John Nester said.
The burden of proof in civil litigation is lower than that for criminal cases. Some experts believe a civil case against the executives may have a better chance of success.
E-mails brought to light in the SEC's civil fraud case against Countrywide CEO Angelo Mozilo and two other former executives of what had been the biggest U.S. mortgage lender showed their awareness that the high-risk subprime loans being sold were toxic and flirting with failure.
Mozilo, named in the SEC's lawsuit filed in June, is the most high-profile individual to face charges from the government in the aftermath of the financial meltdown. He has denied any wrongdoing.
Jacob Frenkel, a former federal prosecutor and SEC enforcement attorney now in private practice, said the Countrywide case "will be a very interesting test based on" the Bear Stearns verdict.
In another meltdown-related case, the SEC is pursuing civil charges against Bank of America Corp. over billions in bonuses paid at Merrill Lynch, which it acquired in a hastily arranged deal at the height of the crisis. The agency accuses the bank of failing to disclose to shareholders that it had authorized Merrill to pay the bonuses even though the investment bank had lost $27.6 billion in 2008.
Bank of America had agreed to pay $33 million to settle the charges but a judge threw that out and the case is headed to trial.
Thomas Gorman, a former senior counsel in the SEC's enforcement division now in private practice, says the jury's rejection in the Bear Stearns case "strongly suggests that the government reassess the line of demarcation between criminal and non-criminal conduct" in bringing charges in business cases.
Prosecutors have "extremely wide latitude" in leveling criminal charges, Gorman wrote on his blog Wednesday. "In exercising that authority it is critical that the government not overreach and criminalize conduct which, at best, may be on the margin."
AP Real Estate Writer Alex Veiga in Los Angeles contributed to this report.