Bear Stearns Hedge Fund Managers Acquitted of Fraud

On Tuesday, two former Bear Stearns hedge fund managers were acquitted of all charges in the first major criminal case spawned by the financial crisis. This case was seen as a major test of just how willing a jury might be to convict people criminally for the damage done by the financial meltdown. These acquittals might make prosecutors reluctant or at least a little bit weary of bringing charges against others in the financial sectors. What these cases basically come down to is whether or not these executives were being purposefully misleading or merely trying to bring an optimistic positive attitude to a troubling situation. Those are questions that are hard to either answer or prove beyond a reasonable doubt.

Ralph Cioffi and Matthew Tannin were accused of securities fraud associated with their management of two funds filled with sub prime mortgage backed securities. These funds ended up losing investors a total of $1.6 billion when the funds collapsed in mid-2007 at the beginning of the financial crisis. In June of 2008 the two men were indicted on charges of conspiracy, securities fraud, and wire fraud. The case against them mostly consisted of e-mails between the managers and conference calls with investors. For the jury this evidence was not enough and both men were acquitted of all the charges brought against them.

“There wasn’t enough evidence … The emails went both ways,” jury forewoman Jenny McCaughey told reporters after the verdict. “They say one thing one time, another thing another time. We just didn’t have enough to convict them.”

Cioffi and Tannin were the first people to be brought up on criminal charges for the role they played in the losses that investors in a financial company accrued as a result of the Wall Street collapse. Since that time investigators have been looking at several other companies such as Lehman Brothers, Fannie Mae, and AIG to determine if there was anything criminal about what they did. This case is showing how difficult it is going to be to make any charges against those companies. In the end, it might be determined that its simply something that its not worth pursing for the prosecutors.

The Wall Street Journal has an excellent article entitled “U.S Loses Bear Fraud Case” that examines this acquital and just what it means for any further cases against financial companies.

The federal bailout of Wall Street has raised the ire of taxpayers and put pressure on the Justice Department to hold top executives accountable for the crisis.

The difficulty in building such cases, say legal experts, is that the financial crisis was marked by such unprecedented market turmoil. As a result, they say, while certain statements by executives ultimately proved incorrect, they can make a case that they believed what they were saying.

How do you really determine if what people were doing was outright lying or deception or merely mismanagement or incompetence. Its really a hard line to actually prove without a shadow of a doubt.

Sure people are going to be mad about the fallout from the financial crisis and maybe looking back on it executives could have handled things differently. However, proving that these actions were in fact criminal is going to be virtually impossible. Nobody tells their customers the exact inner workings and goings on in pretty much any industry. You always try and put a rosy hue on things and hope that they can be turned around. That’s just how you try and keep your customers happy. If you constantly told everyone about possible worst case scenarios, I don’t think many people would be in business in this country.

Now are we supposed to be happy that these innocent men were vindicated, certainly not in my opinion. Their actions while not 100 percent above the board and ethical, weren’t criminal either. Their actions, as well as the actions of most people on Wall Street even to this day, fall into a sort of grey area. When things are going good we can applaud and praise those people for their gray area antics. When things go bad we go looking for a scapegoat.

Jurors believed the defense’s narrative. Another juror, Aram Hong, a 27-year-old Korean immigrant, compared Mr. Cioffi to the captain of a ship, saying that while the ship was sinking, he and his colleagues were “working hard, 24/7…to stop the boat from sinking.”

Its horrible that people lost their money the way they did, but that just is an inherent risk you take when investing. There’s nothing criminal about mismanagement. These men were faced with some unexpected events that they weren’t prepared for or knew how to handle.

There is still a pending civil-fraud lawsuit brought by the Securities and Exchange Commission. This suit was brought forth at the same time as the criminal charges and I think is a much more appropriate venue for this sort of thing. The SEC has already announced that they plan to push forward with that suit and I firmly expect them to be successful.