Oct. 26 (Bloomberg) -- Former Bear Stearns Cos. hedge-fund manager Matthew Tannin, on trial for fraud, won a judge’s ruling blocking jurors from hearing about an e-mail he wrote in 2006, stating “We could blow up,” and “credit is deteriorating.”

The judge in the case ruled today in favor of suppressing the message, which was written in Nov. 2006, months before the 2007 collapse of two hedge funds managed by Tannin and Ralph Cioffi that cost investors $1.6 billion.

“I became very worried very quickly,” Tannin wrote in the e-mail. “Credit is only deteriorating. I was worried that this would all end badly and that I would have to look for work.”

U.S. District Judge Frederic Block in Brooklyn, New York, ruled that the government’s search warrant filed in July with Google Inc. to obtain access to the e-mail was overly broad and “did not comply with the Warrants Clause of the Fourth Amendment.”

Cioffi, 53, and Tannin, 48, are accused of misleading investors about the health of those funds. Both men are charged with conspiracy, securities fraud and wire fraud. They face as many as 20 years in prison if convicted of the most serious count, securities fraud.

‘Blow Up’

Tannin said in the Nov. 23, 2006, e-mail that he had just met with John Geissinger, a Bear Stearns colleague, to discuss the “limits of the fund.”

“We could not run the leverage as high as I had thought we could -- or to see that in an extreme event -- we could blow up,” Tannin said. “I was also very nervous about the state of the market and how we were going to perform.”

Tannin’s lawyers had argued the electronic messages hadn’t been deleted and were preserved. They said the messages shouldn’t be turned over to prosecutors because they were privileged.

Susan Brune, Tannin’s lawyer argued in court papers that the government’s subpoena for e-mails was “overly broad” and that this “blow up” e-mail predated the charged conspiracy of 2007 by several months.

‘Unconstitutionally Broad’

Judge Block agreed, writing today, “The warrant did not, on its face, limit the items to be seized from Tannin’s personal e-mail account to e-mails containing evidence of the crimes charged in the indictment, or, indeed, any crime at all,” Block said. “It was, therefore, unconstitutionally broad,” and violates the Fourth Amendment protections against unreasonable search and seizure, he said.

Robert Nardoza, a spokesman for Brooklyn U.S. Attorney Benton Campbell, didn’t immediately return a voicemail message left at his office seeking comment. Lawyers for Tannin weren’t immediately available for comment.

When the government served a search warrant on Google Inc. in July, the company said the account had been “user deleted.”

On Nov. 7, the U.S. said Google notified prosecutors that a backup copy of all his e-mails had been found on a backup server and a CD-ROM of all of Tannin’s e-mails were sent to the government.

‘No Way’

The U.S. has cited another Gmail message Tannin sent in the June 2008 indictment against both men. The message, sent by Tannin on April 22, 2007, to Cioffi’s wife’s Hotmail account and Ray McGarrigal, another Bear Stearns fund manager.

In the message, Tannin said, “the entire subprime market is toast.” He added, “There is simply no way for us to make money -- ever.”

The defense has argued during the trial that the government selectively “cherry picked” certain e-mails and that they should be read in context and in their entirety.

Tannin’s lawyers note the “toast” e-mail continues, with saying, “If AAA bonds are systematically downgraded then there is simply no way for us to make money -- ever,” Tannin wrote in the message, sent on a Sunday morning. “Caution would lead us to conclude the model is right -- and we’re in bad shape.”

‘Risk Suppression’

At an Oct. 9 hearing before trial, Block, who called prosecutors “hyperactive,” said the U.S. couldn’t argue Tannin deleted his Gmail messages from his account. Block also said defense lawyers won’t be allowed to argue that Tannin voluntarily produced the e-mails.

Block today said in his ruling that if the government didn’t heed his ruling in the future, “it would risk the suppression of evidence that it wished to introduce at trial,” he said. If Tannin takes the stand, prosecutors could use the e- mail to impeach his credibility, the judge said.

Cioffi also faces an insider trading charge with a maximum sentence of 20 years in prison. Both he and Tannin have pleaded not guilty.

The funds, which invested most of their assets in subprime- mortgage-related securities, failed when prices for collateralized debt obligations linked to home loans fell amid rising late payments by borrowers. Bear sought bankruptcy protection for the two funds on July 31, 2007.

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 New York at pathurtado@bloomberg.net

Last Updated: October 26, 2009 15:31 EDT