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Bear Fund Managers Go Free, Big Questions Unanswered

Posted by: David Henry on November 10

Because jury acquittals are absolute and cannot be appealed in the U.S., the not-guilty verdicts of two former Bear Stearns hedge fund managers on Tuesday ought to have provided a sense of closure. They did not.

This end without a true resolution was set in place more than a year ago, when federal prosecutors decided that their best chance of winning a conviction was to try to prove that Ralph Cioffi and Matthew Tannin lied to their fund investors. The prosecutors did not design their case to end with a day in court where there was any real finding-out about whether the two men knew the harm they were causing to millions of people, the financial system, and the economy as they gambled for two years with tens of billions of dollars on securities backed by subprime mortgages.

Instead, the prosecutors set a more modest goal: Prove that Cioffi and Tannin lied on specific occasions to a few dozen well-off, and presumably sophisticated, people about the funds’ condition. The Feds tried to avoid having to say anything more about collateralized debt obligations, repos with brokerage houses, and total return swaps than was absolutely necessary. Their decision was logical: There is a long history of cases in which jurors simply did not understand complicated transactions. (That the prosecutors could not achieve their seemingly more modest goal may discourage other law enforcers from trying to make cases from complicated dealings that brought the failures of Lehman Brothers and AIG.)

To be sure, prosecutors may not have held back evidence that Cioffi and Tannin did anything criminal in leveraging their funds to buy more and more subprime. The men are presumed innocent.

But left unexplored and unanswered for the public is to what extent Cioffi and Tannin were responsible for significant losses at Citigroup and Bank of America. The men were certainly involved. They put together deals that worked to finance subprime mortgages with cash that investors had originally sent to money market funds. The deals pumped up the credit bubble. Their hedge funds obtained essential leverage from Citigroup for three such deals, a series of CDO-squareds named Klio. When the CDOs began to unravel in last summer 2007, Citi was suddenly stuck with the losses that triggered the resignation of CEO Chuck Prince. The Bear funds did a fourth CDO-squared with leverage from Bank of America. The fourth and biggest CDO, for some $4 billion in spring 2007, was the final blow-out of Wall Street’s excesses in subprime mortgage finance.

Such basic facts of Cioffi and Tannin’s use of the CDOs are disclosed in deal documents. There’s no telling what more the prosecutors, with their subpoena power, might have found out about these very transactions that undermined what used to be the two biggest banks in the nation. There’s no telling because the prosecutors took the smaller matters to the jury, and lost.

Reader Comments

Subprime Ambulance Chasers

November 11, 2009 06:36 AM

I am sure lawyers are already salivating, just waiting to drop some civil lawsuits, once these pesky criminal cases are out of the way.

The Great Karnak:
Nothing that matters.

The Question:
What change because of this?

The lawyers will have a good laugh, the bankers will still make big bonuses on bad decisions, and the common folk will pay for it all. Rinse for 70 years then repeat.

Frank Fitton

November 11, 2009 01:56 PM

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.

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.

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 gray 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.

Check out my blog on the Bear Stearns fraud acquittal and the fallout and ramifications from it, at....

Thank you for your interest. This blog is no longer active.



BusinessWeek's Adrienne Carter, Jessica Silver-Greenberg, and David Henry deconstruct the mysteries of high finance, Wall Street, and hedge funds for pros and ordinary investors. E-mail them directly if you've got tips about big deals, a hedge fund, or even securities industry gossip.

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