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Bear Stearns Hedge Fund Managers ‘Facing the Music’

Posted by Larry Doyle on October 12, 2009 12:29 PM |

Is it possible for an industry to accrue trillions in losses and nary an individual forced to truly ‘face the music?’ That reality, perhaps more than any other, is the greatest indictment of the incestuous relationship between Wall Street and its regulatory oversight in the form of the SEC and FINRA.

The music is about to start playing as Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin enter court this week for the start of their trial in which they are accused of misrepresenting the health of their two hedge funds at Bear Stearns.

This trial will attract a tremendous amount of attention. Why? The very fact that it is truly the first legitimate legal proceeding linked to the meltdown of our financial crisis. The trial will highlight incriminating statements and e-mails written by both Cioffi and Tannin. Additionally, we should expect the prosecution to present material which highlights the fact that Cioffi and Tannin seemed to intentionally misrepresent the very nature of their investment holdings.

The Wall Street Journal provides further color on this case in writing, A Case Pitting Spin Against Fraud:

A criminal trial involving two former Bear Stearns executives could help answer a key question stemming from the financial crisis: How far can Wall Street firms go to put a positive spin on bad news?

Ralph Cioffi, a former money manager at Bear Stearns, is escorted by officials to a waiting vehicle in Manhattan on June 19, 2008.

(Ralph Cioffi, a former money manager at Bear Stearns, is escorted by officials to a waiting vehicle in Manhattan on June 19, 2008.)

The two executives, Ralph Cioffi and Matthew Tannin, will fight securities-fraud charges in a widely anticipated trial beginning on Tuesday in a Brooklyn, N.Y., federal court. The money managers unsuccessfully scrambled to keep two mortgage-heavy Bear Stearns hedge funds afloat in 2007 amid sinking mortgage-market prices, the first of several blows that eventually felled Bear Stearns and marked the start of the credit crisis. J.P. Morgan Chase & Co. bought the firm in a March 2008 fire sale.

Prosecutors accused Messrs. Cioffi and Tannin of misleading investors about the health of the two funds, testing the degree to which Wall Street should disclose bad news to investors.

“This case will be viewed by many as a test of where the boundary lies between acceptable, positive spin and outright fraud,” says David Siegal, a former federal prosecutor who now is a defense lawyer at Haynes & Boone LLP. “Much of the government’s case appears poised to rely on what many previously believed was just spin.”

I think Cioffi and Tannin are fighting an uphill battle. Why? Prosecutors and jurists are looking for a few sacrificial lambs to feed the American public. It just so happens that Cioffi and Tannin present the first high profile opportunities to feed the wolves who have a voracious appetite.

What will be Cioffi’s and Tannin’s defense? I would be willing to bet they present a defense which implicates a large part of the Wall Street fabric.¬† The core of that fabric encompasses procedures which embrace a lack of transparency, truth, and integrity along with very little meaningful accountability or consequences meted out by regulators.

Will that defense work? Will it save Cioffi and Tannin? I doubt it, but rest assured that defense does hold some water. Two wrongs never make a right. That said, regulators and prosecutors need to take a much more aggressive internal review of their own procedures to assess why it takes a multi-billion dollar hedge fund collapse before justice is addressed, let alone served.

LD






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