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Ralph Cioffi (L) and Matthew Tannin

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NEW YORK (Fortune) -- While there has been some excitement in the courtroom itself during the first few weeks of the federal criminal trial of Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin, the real action in the trial so far seems to be taking place in and around a small bank in Florida that had nothing to do with the original conspiracy and the fraud charges filed against the two men in June 2008.

If the government gets its way and convinces Judge Frederic Block to allow the evidence into the trial, what Cioffi and Tannin did to permit Cioffi to obtain a $4.25 million line of credit from Busey Bank, in Ft. Myers, Florida, in December 2006, may become the centerpiece of the government's case. Prosecutors believe that they can use documents and testimony to show that Cioffi and Tannin violated a directive from a superior at Bear Stearns to secure the line of credit, and this act indicates that the two men's alleged criminal behavior began much earlier than previously thought.

In a letter sent to Judge Block on October 25, 2009 U.S. Attorney Benton J. Campbell said the government's evidence "will demonstrate that the defendants 'went criminal' months before the conspiracy charged in the indictment, which is something the jury is entitled to know..." (Just as the jury was entitled to learn that Bear Stearns paid Cioffi and Tannin $22 million and $4.4 million, respectively, for the years 2005 and 2006 -- a fun fact that emerged this past week at trial.) Judge Block's ruling on whether to permit the Busey Bank evidence to be entered in the trial -- expected any day now -- could prove a boon to the government's case, which hasn't been going all that well to date.

According to a letter from Campbell to Judge Block on September 25 -- referred to in his subsequent October 25 letter -- Cioffi and his brother invested in "La Firenza," a multi-million dollar condominium project in Longboat Key, Fla., on the Gulf of Mexico. Ralph Cioffi had a 40% ownership stake in the project. (The government has also requested that Cioffi's brother appear as a witness at the trial.) By November 2006, Campbell argued, the Cioffi brothers' building project "was on the verge of foreclosure" and that Busey Bank indicated in an email to Cioffi that it would initiate a proceeding against the Cioffis on November 13. On November 3, Cioffi sent an email to the Busey Bank officials that he was prepared "to secure you with my shares in my Bear Stearns Hedge Fund" -- Cioffi claimed the shares were worth $5.7 million as of October 31, 2006 -- as a way to obtain the new line of credit to allow the construction on the project to continue.

A few days later, Campbell alleged, Tannin, on Cioffi's behalf, sought to get the appropriate documents and approval from his colleagues at Bear Stearns Asset Management. Without the proper BSAM approvals, Cioffi's interest in the hedge funds could not be pledged as the collateral for the Busey Bank loan. At one point on November 6, Tannin asked in an email whether BSAM's general counsel had "okayed" Cioffi's pledge agreement. The general counsel responded, "not yet" and asked Tannin to inform Cioffi that "[s]ometimes, in times of difficulty, we prohibit managers from removing their investment in favor of clients going first. This [pledge] arrangement has the potential to interfere with that if there was a problem and the bank seized the assets at an inopportune time."

In and around November 14, Greg Quental, Bear's Global Head of Hedge Funds, stopped by Cioffi's office to tell him "in no uncertain or ambiguous terms, that BSAM did not consent to Cioffi's pledge," according to Campbell's September 25 letter. Among the reasons Quental gave for denying the request was "his concern that such a pledge would have to be disclosed to [f]und investors." At this, Campbell wrote, Cioffi "became enraged, resorting to expletives, and blamed the decision on BSAM's [g]eneral [c]ounsel."

Despite Quental's denial, Campbell claimed, Tannin and Cioffi went ahead and obtained the pledge agreement anyway. Without disclosing Quental's decision, Tannin allegedly went to a BSAM officer described as the "Middle Office Manager" and got his required signature on the document. Tannin signed the document as a "representative of BSAM" and Cioffi signed the document as the borrower. The fourth signature line was for a Busey Bank senior vice president, who signed the document on December 20, 2006.

The pledge agreement had a long list of conditions, among them being that BSAM had consented to Cioffi's pledge, which only Quental could do, and he had not, Campbell alleged. Campbell's October 25 letter to Judge Block stated that Quental was to be the government's next witness in the case, and he would testify that he never gave his consent to Cioffi for the pledge agreement. (Quental did testify yesterday that he and BSAM had not consented to the pledge). The letter also said that Rich Marin, BSAM's CEO, would also testify -- likely this week as well -- that "he did not approve the pledge" either.

According to Campbell's September 25 letter, "In sum, the facts will show that Cioffi and Tannin conspired to circumvent BSAM's denial of consent for Cioffi's pledge. Together, the defendants duped the Middle Office Manager into signing the pledge and later lied to Busey Bank in representing... that BSAM consented to the pledge when they knew that was false. As a result of their efforts, Busey Bank was defrauded into granting Cioffi a $4,250,000 line of credit based, in part, on collateral in which the bank did not have a registered interest and was later rendered worthless" when the two Bear Stearns hedge funds that Cioffi and Tannin managed were liquidated in July 2007. Without saying how, Campbell did note that the Busey Bank loan was repaid even though its collateral "was reduced to zero."

As noted in an October 2 Fortune.com post, the plot thickened with regard to the Busey Bank saga when Cioffi unexpectedly flew down to Ft. Myers to try to obtain the original pledge agreements himself, even though the documents were subject to a federal subpoena. In an alleged voice mail message Cioffi left on September 18, he said to the Busey Bank employee: "Jen, Hi, Ralph Cioffi calling, it's Friday morning, it's 8:30 a.m., I'm actually on my way to Ft. Myers from Newark Airport, New Jersey. I land about 12:15. I'll call you when I land. I was hoping to in the meantime you might have been able to find the file and if you had, I would love to come by and get a fax copy of the document or the document itself. In any event, my number is [number redacted], if in fact you wanted to call me and leave me a message one way or another. If I don't hear from you I'll check in when I land. Thanks."

When a bank employee informed Cioffi that his original loan documents had not yet been located, Cioffi asked that the originals be sent by "Federal Express to his residence in Tenafly, New Jersey."

For their part, Cioffi's attorneys at Williams & Connolly are having none of the government's argument. They wrote, in a September 28, response that the Busey Bank pledge issue is a "red herring" since "not only was that pledge approved ... but more to the point, as even the government now concedes, the contemporaneous evidence demonstrates just the opposite of what the government seeks to show: that there was no requirement that Mr. Cioffi disclose his pledge..." Cioffi's lawyers wrote the "documents demonstrate" that BSAM's "Head of Accounting" signed the pledge. Cioffi's lawyers were silent about whether Quentel had explicitly denied Cioffi's request to make the pledge. His name was not mentioned in their response.

Whether Judge Block will rule in the government's favor is not clear. Yesterday, when the issue of the October 25 letter came up with the jury not in the room, the Judge admonished the government. "I haven't read the letter yet," he said. "If the focus is going to be what happened to Busey Bank, this has nothing to do with this trial, tangentially that's about it, it really tries to paint the defendant as dirty and I'm troubled by, frankly, that collateral matter." And then by saying the evidence "is somewhat relevant," he suddenly agreed to allow some testimony that the consent was not properly obtained.

In a separate ruling October 26, he found in favor of the defense when he decided that a secret diary that Tannin had been writing on his Google Gmail account could not be placed into evidence. He found that the government's subpoena seeking access to the account from Google was overly broad and not in compliance with the Fourth Amendment to the Constitution. In arguing for the release into evidence of the diary, the government shared the first entry of it, dated November 23, 2006, in which Tannin wrote in part: "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...I was also very nervous about the state of the market and how we were going to perform."