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My Thoughts on the Bear Stearns Hedge Fund Case

Posted by Larry Doyle on November 11, 2009 10:26 AM |

Ralph Cioffi and Matthew Tannin

Ralph Cioffi and Matthew Tannin

Does yesterday’s verdict in the Bear Stearns hedge fund case establish a precedent that precludes likely guilty verdicts in other financial fraud cases? Let’s hope not.

I did not sit in on this trial, so I am not about to weigh in on the verdict. Consensus opinion from those who did sit in on the trial seems to agree that the prosecution presented a very weak case. Additionally, the prosecution was challenged from the standpoint of not being able to admit selected and seemingly incriminating e-mails as evidence.

The not guilty verdict in this specific case does not preclude Cioffi and Tannin from facing other charges. What was the key to this case? The Wall Street Journal sheds light on this case and verdict in writing, U.S. Loses Bear Fraud Case:

The acquittals are a setback for the U.S. attorney’s office in Brooklyn, N.Y., which along with several other offices is investigating Wall Street for possible criminal wrongdoing stemming from the credit crisis, including at Lehman Brothers Holdings Inc. and American International Group Inc. In Tuesday’s case, the question boiled down to this: Were the two men misleading investors, or simply putting a positive spin on sagging returns?

Jurors in Brooklyn found there was no evidence beyond a reasonable doubt that the defendants had criminal intent and conspired to mislead their investors. There “was nothing that was clear and convincing,” said juror Tabasam Bhatti, a 31-year-old civil servant. The prosecution didn’t provide “enough information,” he said.

Not enough information. Interesting. Having followed reports and developments on this case, I am left with the opinion that the prosecution targeted the ‘final weeks, days, and hours’ of this financial meltdown.

Would they ever have thought to more fully investigate and present information pertaining to the marketing material for the Bear funds? If so, what may the prosecutors have found? Let’s review what William Cohan put forth in his book, House of Cards, starting on page 309. Cohan highlights that monthly customer statements put forth by Cioffi and Tannin misrepresented the funds’ sub-prime mortgage exposures. Specifically, a December 2006 statement for the High Grade Fund claimed the fund had only 6.2% sub-prime mortgages. Cohen, who in writing his book spoke extensively with Bear Stearns insiders, claims this number was grossly underestimated.

Cohan puts forth that subsequent customer statements also misrepresented the sub-prime exposure.

I always viewed this material as the critically important information in the case.

Guilt or innocence is not mine to ascertain. I respect our system of justice. That said, I would only hope that in order for justice to be properly served all pertinent information is presented.

What is the lesson for investors? Once again, Buyer Beware!!


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