Nov. 7 (Bloomberg) -- Former Bear Stearns Cos. hedge-fund managers Ralph Cioffi and Matthew Tannin conspired to mislead investors about the health of their funds that collapsed in 2007, a prosecutor told a jury at their fraud trial.

In his final comments to jurors yesterday, Assistant U.S. Attorney James McGovern walked the panel through what he said were a series of lies by both men about their personal holdings in the funds as well as the amount of withdrawals by investors.

“There is evidence here of a conspiracy which is ‘Let’s not tell anybody about the problems we’re having,’” McGovern said. “It’s also about ‘Let’s not tell the investors about the level of redemptions we’re having, because then there will be a run on the bank.’”

Cioffi, 53, the portfolio manager and Tannin, 48, the funds’ chief operating officer, went on trial Oct. 13 in federal court in Brooklyn, New York, on charges of conspiracy, securities fraud and wire fraud. Each faces as long as 20 years in prison if convicted of the most serious count of securities fraud. Both men have pleaded not guilty. The funds’ collapse cost investors $1.6 billion.

Defense lawyers for both men presented their closing arguments to the jury yesterday, insisting that prosecutors had failed to meet their burden of proving beyond a reasonable doubt that the two intentionally lied, conspired or defrauded investors.

‘Hindsight, Bias’

Susan Brune, a lawyer for Tannin, said the prosecution’s case was “built on hindsight and bias” and that a lawyer for the government mischaracterized the evidence against her client.

She said Tannin, Cioffi and others at Bear Stearns were positive about prospects for the funds and about buying opportunities in a down market.

“The prosecution’s theory is that these defendants knew the funds were doomed,” Brune said. “And because they knew what the future held, they hatched a criminal conspiracy to lie and obstruct justice.” Brune said the government is wrong that the defendants concealed the failing health of funds to investors from March to June in 2007.

Brune, while nearing the end of her statements to the jury, began to cry.

“When I am done, the prosecution is going to get up here and say ‘Lie, lie, lie.’ That is a strong word. But lying is not a substitute for actual proof,” she said. “Send Matt home, to his family.”

Dane Butswinkas, Cioffi’s lawyer, accused the government of glossing over evidence and selectively presenting the facts of the case.

‘Heroic Undertaking’

“This is a case that is built on misimpressions, on e- mails pulled out of time without the presentation of the back story,” he told jurors in his closing argument. He said the jury’s job in deliberations is “a heroic undertaking when public opinion about Wall Street is where it is.”

Both prosecutors and defense lawyers have argued over the meaning of an April 22, 2007, e-mail that Tannin sent from his personal Gmail account to a Hotmail account in the name of Cioffi’s wife.

“The entire subprime market is toast,” Tannin wrote in the e-mail. “If AAA bonds are systematically downgraded then there is simply no way for us to make money -- ever.”

Tannin added, “Caution would lead us to conclude the model is right -- and we’re in bad shape.”

Brune said yesterday that Tannin had a bleak outlook when he wrote the message because he’d misunderstood a mathematical model created by a Bear Stearns analyst.

“This is a Gmail which the government has tried to freeze dry,” she said.

‘Not a Good Thing’

McGovern, in his rebuttal argument responding to the defense lawyers, argued Tannin’s e-mail showed the level of concern he had about the funds’ prospects.

“If you read this e-mail, ‘toast’ is not a good thing,” McGovern said.

“He’s not saying ‘You hedge against the toast,’” McGovern said. “It is saying ‘The market that we deal in is over.’ There is no other reading of this e-mail.”

McGovern, citing evidence the men together earned $20 million in bonuses in profitable years, said their motive was clear.

“They tried to ride it out and they couldn’t,” he said. “It wasn’t to have a dead fund. It was the market would recover some day and they could go back to making $20 million a year.”

Redemption Requests

The government also alleges Cioffi told investors there were only “a couple million” dollars in redemptions during a conference call on April 25, 2007, a week after one investor submitted a redemption for a $57 million stake in the funds.

“You are called upon to answer as to whether or not there has been a violation of the law,” McGovern told jurors. “They lied to their investors. They defrauded their investors. They misled their investors. And it’s time for them to be held accountable.”

Cioffi is also charged with insider trading for allegedly moving $2 million, about one-third of his investment in the two funds, in March 2007 into a third fund he supervised at Bear Stearns.

U.S. District Judge Frederic Block, who is presiding over the trial, told jurors he will instruct them on the law on Nov. 9 before they begin their deliberations.

The case is U.S. v. Cioffi, 08-CR-00415, U.S. District Court, Eastern District of New York (Brooklyn).

To contact the reporter on this story: Patricia Hurtado in Brooklyn, New York, at pathurtado@bloomberg.net.

Last Updated: November 7, 2009 00:01 EST