The Bear Stearns Verdict: A Blow to E-Mail Prosecutions

Note to execs: It's safe to hit "Send" again.

On Nov. 10, a jury found a pair of former Bear Stearns hedge-fund managers not guilty of securities fraud. At the center of the case was an e-mail that one of the managers, Matthew Tannin, sent to his colleague Ralph Cioffi indicating he was concerned about the health of their fund. Publicly, Tannin continued to tell investors he was confident the fund would perform well.

The case has drawn attention even though Cioffi and Tannin were relatively unknown. The hedge-fund managers are the only Wall Streeters who have faced criminal charges relating to the subprime-mortgage mess. Because of that, many saw it as a litmus test for cases against others who were thought to have had a role in causing last year's financial crisis. But the case may ultimately have much greater significance. The not-guilty outcome may signal the end of the era of e-mail prosecutions.

John Coffee, a law professor at Columbia University, says the Bear Stearns hedge-fund case, which jurors decided in less than a day, will make prosecutors think twice before bringing a case that hinges on e-mail. Coffee once called e-mail evidence "the biggest advancement in law enforcement since the two-way radio." But the Bear Stearns case and others have caused Coffee to reconsider how powerful e-mails are in court. "The jury was totally unconvinced," says Coffee. "It does not mean all white-collar cases will not go forward, but I do think it will cause prosecutors to come to the conclusion that e-mail evidence alone is not enough to bring a case."

Still, legal experts say executives and others could end up getting bitten when they hit "Reply." Law professor Richard Painter of the University of Minnesota says e-mail will continue to be admitted as evidence and play an important role, particularly in white-collar prosecutions. "The fact of the matter is that people say things they shouldn't by e-mail," says Painter. "So as long as we continue to use e-mail, you are going to see it in cases."

Nevertheless, the days of e-mails driving prosecutions may be coming to an end. Eliot Spitzer exploded e-mail onto the legal scene in the early part of this decade. As New York attorney general, Spitzer used internal e-mails sent by analysts to prove that Wall Street firms were pushing stocks their professionals didn't believe were good investments just to generate investment-banking fees. In one famous case, former Merrill Lynch analyst Henry Blodget told investors to buy stocks about which he privately wrote in e-mails to colleagues were "horrible," a "disaster" and a "POS," or piece of s___. Blodget paid $4 million to settle Spitzer's charges. The total civil penalties for Wall Street's research infractions reached $875 million. The conclusion: e-mail evidence was gold.

Since then, e-mail has played an increasingly important role in prosecutions. Unlike wiretaps, e-mails eliminate the problem of entrapment. They are records of what someone was saying voluntarily, on their own. Accounting firm Arthur Andersen was indicted for its role in Enron's financial fraud in part because of an e-mail that told employees to eliminate any unnecessary paperwork. A shredding party ensued. In the Martha Stewart insider-trading case, jurors said one of the more damaging pieces of evidence had to do with the fact that Stewart tried to alter an e-mail that had been sent by her assistant. Prosecutors used an e-mail exchange between Stewart and her broker that occurred shortly before Stewart sold her Imclone shares to prove that they knew they were acting on insider information. Stewart was convicted in the case and served five months in jail. In the Tyco case, prosecutors used e-mails to show that chief executive Dennis Kozlowski and chief financial officer Mark Swartz pressured Wall Street firms to maintain positive ratings on their company.

In the wake of the financial crisis, prosecutors again hoped e-mail would point to wrongdoers. In mid-2008, the Securities and Exchange Commission released e-mails that seemed to show that analysts at credit-rating agencies understood that the mortgage bonds they were rating AAA were actually much riskier than that. An analyst wrote to a colleague, "Let's hope we're all wealthy and retired by the time this house of cards falters." However, no criminal charges have been brought against rating-agency officials.

Then there is the case against Cioffi and Tannin. In April 2007, Tannin told Cioffi in an e-mail that there was "simply no way for us to make money — ever," for investors in their fund. Then several days later, Tannin told investors in a conference call that he was "comfortable" that his fund would continue to go up. The e-mail makes it look like Tannin was lying to his investors, but the e-mail that prosecutors cited was just one of many between the two managers. At other times, the managers seemed to be less sure that the fund was doomed. They said aggressive bets might pull the fund out of its problems. In the end, the jurors didn't think there was enough evidence to prove that the managers were intentionally trying to mislead investors.

Prominent defense attorney Stanley S. Arkin says that even though e-mails can be credible evidence, prosecutors have taken it too far. "It has led prosecutors to bring cases that might not have been brought otherwise," says Arkin. "The problem is, e-mails can often be confusing. They are brief and often written without a lot of thought." Arkin and others say the Bear Stearns hedge-fund case shows that jurors understand that. Without other evidence, prosecutors will have a hard time convincing jurors that what someone wrote in an e-mail is definitively what they believe.

These days, even Spitzer acknowledges the limitations of e-mail in winning prosecutions. "Prosecutors, defense attorneys and jurors will continue to see e-mails as powerful pieces of evidence," says Spitzer, who is now teaching a class on law and public policy at the City College of New York. "It's a powerful window into what someone is thinking at the time, but it's limited to that time and can often be misunderstood."