Insider Trading: Cioffi's Motion to Dismiss

A motion to dismiss is pending with regard to count four of the indictment of Ralph Cioffi (Eastern District, NY, case #08-cr-00415 FB).

Cioffi, as my readers may remember, is one of two men arrested last year in connection with the collapse in 2007 of two hedge funds within Bear Stearns that had made huge bets on subprime mortgages.

Both Cioffi and his alleged co-conspirator, Matthew Tannin, are charged with securities fraud, in that they continued to present their funds to the investing public as an "awesome opportunity" even while privately concerned about their sustainability.

Cioffi, but not Tannin, is also accused of insider trading (Count Four) in that he "sold shares he owned in the Enhanced Fund while in possession of material non-public information regarding the Funds' liquidity," etc.That is the count with which this motion to dismiss deals.

The motion to dismiss itself seeks to make a distinction between the hedge funds themselves as an entity and their investors. Inside trading, it contends, is not an offense against the public at large but against a particular entity with which the insider has a fiduciary relationship. If the hedge fund in question had been a public corporation, Cioffi would have had a fiduciary duty to its shareholders. But as it was a hedge fund, his duty runs to the fund as such, not to its investors, so the government's case is "flawed as a matter of law."

Filing #116 includes this motion (May 22) and its supporting memorandum.

Filing #133 gives the district attorney's reaction (July 7). The DA accepts the defense characterization of Cioffi's duty as running to the fund, and claims that this is the duty that was criminally violated. The violations vis-a-vis the other investors are derivative of that.

Although I oppose the whole idea of "insider trading" as a criminal offense, thinking "within the box" of established legal concepts, I have to say the defense counsel's point seems a bit weak to me here.