About Those Bear Stearns Fund Manager Indictments
Eastern cultures ascribe events to destiny, fate, or “karma.” But in our culture we demand to know who is to blame. The Zeitgeist of America’s blame culture apparently has decreed that Ralph Cioffi and Matthew Tannin, the former Bear Stearns fund managers, are to be the first level scapegoats for the subprime crisis. The “perp walk” to which they were subjected last week – why? Whatever happened to the presumption of innocence?—is now a standard component of the American blame ritual.
But a review of the charges against them does raise some concerns. Indeed, many observers have already questioned the proceedings.
A number of commentators have observed that Cioffi and Tannin’s alleged misrepresentations were no different than those of many others on Wall Street. Indeed, both Bloomberg’s Caroline Baum (here) and Professor Peter Henning of the White Collar Crime Prof blog (here) see little difference between Cioffi and Tannin’s statements about the Bear funds and the remarks of Bear Stearn’s CEO Alan Scwartz two days before the company’s collapse that “our liquidity position has not changed.” Professor Ribstein, on his Ideoblog (here), suggests that the difference between Cioffi and Tannin on the one hand, and Schwarz on the other, is that Cioffi and Tannin made the mistake of being hedge fund managers rather than corporate executives (“the bad luck of their chosen line of work”)
Some commentators even question the culpability of the two individuals’ alleged misrepresentations. As Professor Henning notes:
A false hope that the hedge funds would pull through, no matter how misguided, can be a defense to a fraud charge. Showing that Cioffi and Tannin were of two minds, or conflicted about where the market was headed, does not mean that the statements to investors were part of a fraudulent scheme.
Professor Henning goes on to observe:
As a Wall Street case, the charges seem a bit thin to me. Hedge fund managers are essentially salesmen, touting their wares in much the same way that the man in the used car lot has a great deal for you….The fact that Wall Street salesmen talked out of both sides of their mouths is nothing new.
Professor Henning also questions the significance of Cioffi’s withdrawl of $2 million from one of the funds, noting that “withdrawing your own money is not the type of theft one expects to see in a fraud case.”
In a Wall Street Journal op-ed piece today (here), former prosecutor Robert Mintz suggests that the duo’s biggest mistake was failing first – “these two were among the first to see their funds implode and that, perhaps more than any other reason, is why they now find themselves facing the prospect of significant jail time.”
These observations are all interesting and might (perhaps under different circumstances) suggest that the government could face an uphill battle. However, the circumstances demand a burnt offering and that is why Cioffi and Tannin were dragged into the public square. A burnt offering we shall have.
There is one additional element of the indictment that has not received as much attention that may be worth noting here. That is, as discussed in the U.S. Attorney’s June 19, 2008 press release (here), one element of the indictment relates to a possible cover up. The press release states that, after the SEC had requested the production of documents and materials in Summer 2007, Tannin’s “tablet computer” and Cioff’s “notebook” apparently “went missing."
One of the ineradicable lessons from the Watergate era is that the evasion will get you even if the underlying conduct does not. (Just ask Martha Stewart.) If the government can show that the defendants did inappropriately dispose of their technological devices as part of an evasion, the cover-up charges could loom a great deal larger.
And while the commentators may question the criminal indictment, they recognize that the alleged misconduct might support civil liability. Indeed, Professor Ribstein acknowledges that while “not a criminal case,” this “sort of case is suited for a civil fraud claim.” It has been somewhat overshadowed by the criminal indictment, but the SEC did in fact file a civil enforcement proceeding against Cioffi and Tannin at the same time as the indictment.
The SEC enforcement action (as described in the SEC’s June 19, 2008 Litigation Release, here), contains additional allegations against the two, including for example, that they “misrepresented the funds’ deteriorating condition and the level of investor redemption requests in order to bring in new money and keep existing investors and institutional counterparties from withdrawing money.” Among other things, the SEC alleges that Cioffi and Tannin “misrepresented their funds’ investment in subprime mortgage-backed securities.” It is alleged that the funds’ monthly performance summaries described the exposure as from 6 to 8 percent, when it supposedly later emerged that the “total subprime exposure – direct and indirect—was approximately 60 percent.”
The SEC seeks “permanent injunctive relief, disgorgement of all illegal profits plus prejudgment interest, and the imposition of civil monetary penalties.” But as serious as are these proposed sanctions, they still pale by comparison to the threat of incarceration the individuals face as a result of the criminal indictment.
As the U.S. Attorney’s press release states, “if convicted of securities fraud, Cioffi and Tannin face maximum sentences of 20 years imprisonment. If convicted of conspiracy, they each face a maximum sentence of five years.”
All of which leads to the final question. As Robert Mintz asked in his Journal op-ed piece today, “are we attempting to criminalize conduct primarily based upon the fact that we now know that the investing decisions led to a bad end?”
UPDATE: Professor Jay Brown has a paritcularly good post today on these same themes on his Race to the Bottom blog (here). Among other things, Professor Brown says that "this matter should be left to the Securities and Exchange Commission and the private investors...It should not be left to the criminal authorities."
Just the Thing: Even more American than the instinct to blame is the propensity for someone to try and profit off of another’s misfortune. And in that spirit, readers may be interested to know that a Ralph Cioffi signed Bear Stearns Hedge Fund Christmas Card is available (here) on eBay. As of the time of this blog post, the current bid was $81.
Sometimes I feel like the entire world is nothing more than abstraction of the old comic strip, The Strange World of Mr. Mum.
The case is pathetic. I am very supportive of criminal prosecution for the fraudsters on Wall Street but this case is weak! I believe some of the characters that are operating on the Street need to go to prison. A fine is NOT enough of a deterrent.
I hope the US Attorney's Office has more in their case files then what is in the indictment. Everyone of those counts can be defended against with a reasonable explanation. It is apparent that both of them are two managers that were unsure of the overall markets and they did not want to have a run on their funds. If Cioffi really feared for his investments, why did he only move out 2 million and not the entire 8 million?
Tannin is trained as an attorney and his management style for his fund is indicative of his training: a lawyer will try and analyze every possible scenario before implementing. Tannin was trying to figure out all of the possible options. As for using the private email, everyone knows that there is no privacy around the company email. He did not want a leak to the public regarding his trepidation.
It is great Monday morning quaterbacking by many in the press. If it is true that they violated their investment policy by overexposing their funds to sub-prime, then I want the Feds to go after all the mutual funds that do that every day in between their 90 day disclosure requirements. If either Cioffi or Tannin are reading this post, please call...I will do this one at costs!
P.S. If the US Attorney wants a case take a closer look at Bear's prime brokerage operations or Citigroup's most recent Argentine SEC settlement deal.
It is clear that the Fed cannot indict and convict every criminal who breaks the law anymore than the traffic cop can catch every speeder that zooms through his radar field. Some are caught but others get away.
The point is we should not have fiduciaries in play who are not forthright with the public. Let's face it, the whole sub prime debacle is based on greed. Greed on the part of home buyers who really could not afford what they coveted and greed on the part of those who wanted to make a big fast buck.
I don't know the facts in this case - just the hearsay of those who have reported. What I do know is that the only real way to curb these type excesses is the fear of jail time and embarrassment. My security law friends tell me that jail is not a comfortable word at a cocktail party.
The Fed will never catch every person who commits fraud anymore than the traffic cop catch every speeder who zooms through his radar. Some get caught, others get away. Just because we don't catch some doesn't mean we should limit prosecution of others. Juries exist to sort facts and determine guilt or innocence.
I don't know the facts in this case, just the hearsay that has been reported. What I do know that jail time and embarrassment are pretty good deterents to white collar criminals.
I think we can all agree that we do not want fiduciaries in play who fleece the public. Fund managers should be forthright. Transparency is important.
The whole sub prime debacle is about greed. Greed on the part of buyers who could not afford, contractors who wanted the building boom to stay alive, realtors and appraisers who wanted the deal to go through, and lenders who funded the whole thing by getting a signature on a loan agreement. The ability to pay back was never a concern.
I say let the Feds do their jobs. Executives in handcuffs do have a beneficial effect on causing folks to do the right thing. My securities law friends tell me that jail time is always an unpleasant topic at cocktail parties. In fact it seems to have a chilling effect on those who might be inclined to take unlawful liberties