Saturday, November 14, 2009

Fed's Lose Major Subprime Fraud Case: Bear Stearns Hedge Fund Managers Acquitted

On Tuesday of this week, the Department of Justice suffered a major set-back in the first trial stemming from the subprime and financial markets meltdown. Ralph Cioffi and Matthew Tannin, both former Bear Stearns hedge fund managers, were found not guilty on all charges by a U.S. District Court jury in Brooklyn, New York. Federal prosecutors alleged that Cioffi and tannin falsely inflated the value of their portfolios despite knowing that the mortgage-backed securities in their funds were at risk of collapse.

The Bear Stearns hedge funds managed by Cioffi and tannin collapsed in June of 2007. Investors lost $1.6 billion. Both Cioffi and Tannin were charged with numerous counts of securities fraud, wire fraud and conspiracy. Had they been convicted, both Cioffi and Tannin faced upwards of 20 years in prison. Additionally, Cioffi faced an added 20 years on an insider trading charge alleging that he shifted $2 million of his own money out of a poorly-performing fund to a separate fund that he oversaw. A number of jurors indicated that the government’s theory of the case and allegations just did not stick. Some jurors indicated that the government seemed to be trying to unfairly hold Cioffi and Tannin responsible for the impending collapse of financial markets, particularly at a time when even the best economists were uncertain about the direction of the markets.

Cioffi’s and Tannin’s defense attorneys argued that the two men were overly enthusiastic about the market and their funds performance. The defense also argued that the men had no way of knowing what lay ahead: namely, the subprime mortgage crisis and the housing market bubble burst of 2007.

In a political and economic climate where average everyday people want to draw “blood” from grossly overpaid executives, this is a tough set-back for the Department of Justice. This case was the first high-profile subprime mortgage case to go to trial. “The month-long trial was viewed as a barometer for future investigations of possible fraud at other firms that may have exacerbated last year’s financial meltdown.” Reportedly, former executives at AIG and Lehman Brothers are under investigation for their roles in the financial meltdown. Hopefully, the Department of Justice has learned a value lesson. If not, surely the defense bar will be taking notes of the arguments and theories put forward by the Cioffi and Tannin defense teams.

1 comment:

  1. Joe:

    I am still reeling.

    If the defense is always "well who knew the whole system was riven by fraud" then each individual fraudfeasor gets acquitted. Everyone blames everyone else.

    I see it replaying again and again like a bad movie: the brokers blame the originators who blame the ratings agencies who blame the securitizers who blame the CEOs who blame the Fed for low interest rates who blame the Chinese for currency manipulation.

    Meanwhile, the pervasive lack of discipline continues until the next crisis.