Emails hold key to trial of Bear Stearns' former fund managers

Wall Street financiers to face jury over alleged securities and wire fraud

The arrests of Matthew Tannin and Ralph Cioffi in June last year provided the first "perp walk" of the credit crisis – the first chance for the media to photograph the handcuffed bankers accused of carrying out fraud as the financial world unravelled around them.

Today, the trial of the two former Bear Stearns hedge fund managers will finally get under way in a New York courtroom, providing the first legal showdown for the US Department of Justice as it seeks to assuage public anger over the irresponsibility and excess on Wall Street. Both sides are predicting it will be a bitter affair, after a series of legal skirmishes about what can be used as evidence and about the defendants'behaviour as they prepared for the trial.

The prosecution alleges that Mr Tannin, 48, and Mr Cioffi, 53, lied to the outside investors in the hedge funds they ran at the bank. The defence is expected to argue that the pair are being made scapegoats for a credit crisis that was not of their making and which subsequently engulfed them.

Despite the high-profile nature of the case, neither side argues that the alleged crimes of Mr Cioffi and Mr Tannin contributed to the collapse of Bear Stearns, the first of the major investment banks to fail last year, and the wider market meltdown.

But the prosecution alleges that both men continued to sell investors on an optimistic story about the possible future profits from their two funds – long after they concluded that the subprime mortgage market was, in the words of one damning email between them, "toast". Attorneys for the Department of Justice have amassed 532 exhibits, including scores of emails, which they say prove that Mr Cioffi and Mr Tannin are guilty of conspiracy, securities fraud and wire fraud. They face up to 20 years in prison if convicted of the most serious charge of securities fraud. Mr Cioffi is charged with an additional count of insider trading for withdrawing $2m (£1.3m) from one of the funds.

The pair believed as early as March 2007 that their funds, heavily invested in sub-prime mortgages, were in trouble, perhaps terminal trouble, but they continued to solicit new investors by promising them an "awesome" investment opportunity, it is alleged.

Personal emails recovered from Google on the eve of the trial reveal that Mr Tannin even discussed the possibility that the funds might "blow up" in late 2006. The personal email account was deleted by Mr Tannin when Bear Stearns collapsed, but prosecutors ordered Google to search its servers to recover the account, which Mr Tannin used as a kind of personal diary. Lawyers from both sides recognise that much will hinge on the make-up of the jury, which is why selection is expected to be contentious when it begins this morning.

James Cox, a law professor at Duke University, said defence lawyers would be keen to weed out potential jurors who might harbour such biases. "Unfortunately, the defendants wear the scarlet 'IB' for investment banker across their chests and this is a problem for them," he added. "Juries have not been very friendly to executives who are seen as poster children for an ongoing financial climate."