Bulletin: A federal court jury in Brooklyn has concluded that two former Bear Stearns hedge fund managers did not cause, or have advance knowledge of, the global credit crisis.
But to aggressive federal prosecutors, they looked like promising scapegoats. Ralph Cioffi, the founder and senior portfolio manager of the two funds, and Matthew Tannin, a portfolio manager, were charged in 2008 with conspiracy, securities fraud and wire fraud in connection with the collapse of their funds in 2007. Bear Stearns itself imploded just three months before the indictment, which also charged Cioffi with insider trading. If convicted, the men could have been sentenced to up to 20 years of imprisonment for securities fraud and up to five years for conspiracy. (The wire fraud charge was dropped from the case in Brooklyn federal court, but prosecutors have said it may be re-filed in Manhattan.)
Relying mostly on cherry-picked quotes culled from the defendants’ voluminous emails, the feds alleged that Cioffi and Tannin blithely assured investors that all was well, even after they concluded that their investment vehicles were doomed. Their motive, allegedly, was to protect their own bonuses.
It took 12 mostly middle-class jurors only nine hours of deliberations over two days to reject the government’s case. In one email, cited by the prosecution, Cioffi wrote to Tannin, “[T]he subprime market looks pretty damn ugly.... If we believe [our internal modeling] is ANYWHERE CLOSE to accurate I think we should close the funds now. The reason for this is that if [our internal modeling] is correct then the entire subprime market is toast.... If AAA bonds are systematically downgraded then there is simply no way for us to make money—ever.” A few days later, Tannin told investors, “we’re very comfortable with exactly where we are.”
But, once all the ellipses in Tannin’s email were filled in, a story very different from the one that the prosecution wanted to tell emerged, according to juror Aram Hong. She said that the complete email revealed that the managers were making a decision between closing the funds and looking at the flagging mortgage market as an opportunity to buy. “They decided, ‘We need to make a decision now. And we need to be aggressive whichever way we go,'” Hong said.
The Bear Stearns case is the latest in a long line of efforts by overreaching prosecutors to make a crime out of everyday acts ranging from bad luck to bad business decisions to incompetence. These cases usually are portrayed as the government defending the little guy against corporate malfeasance. But, most of the time, the deck is stacked the other way.
Prosecutors who can, in the famous words of former New York Chief Judge Sol Wachtler, get a grand jury to indict a ham sandwich, enjoy near-total immunity when they bring charges out of legal thin air. Acquitted defendants cannot sue a prosecutor for legal malpractice, even when that is exactly what has happened. Judges rarely throw out a case that can be described, as the Bear Stearns prosecution was, as a “stretch.” Judges see it as their responsibility to let each side have its day in court. That means defendants in unfair prosecutions are pretty much on their own. It helps a lot if they can afford good lawyers.
Being a prosecutor means never having to say you’re sorry. If Cioffi and Tannin expect an apology from U.S. Attorney Benton Campbell, whose office brought the charges against them, they will wait a long time to get it. Campbell issued a press release that grudgingly noted the jurors had spoken and that “we accept their verdict,” as though his team had some other option. He then proceeded to thank every individual and agency that worked on the case except, of course, the defense lawyers and the jurors who prevented justice from miscarrying.
At trial, prosecutors made a point of noting the defendants’ multi-million-dollar incomes during their funds’ better days and stressed that the losses from their failure exceeded $1 billion. That’s a lot of money to an average citizen. But rather than 12 blood-hungry members of an angry public, they had a rational, competent jury, which, according to forewoman Jenny McCaughey, “made a point of saying, ‘We’re not going to look at the fact that we’re in a recession, or that the markets are down. Because that wasn’t relevant to the case.’”
This was a case that never should have been brought. Hedge funds are marketed to institutions and big investors who have recourse to their own civil lawsuits if they believe they were misled. This case was about collecting headlines — specifically, headlines about who was at fault when Bear Stearns collapsed — and scalps.
We need prosecutors to do their jobs. They should be free to bring cases, even bad cases. But the power to prosecute should come with accountability. Bar associations or government bodies should establish a system to publicly evaluate failed prosecutions and opine on the quality of the prosecutors’ work. Would it be second-guessing? Absolutely. But prosecutors who lose their perspective and seek headlines rather than justice deserve whatever publicity comes their way.