In a somewhat surprising decision today, former Bear Stearns hedge fund managers Ralph Cioffi and Matt Tannin were found not guilty by a jury of their peers in federal court. Nearly a month to the day after their trial began, the jury ruled that Cioffi and Tannin did not mislead investors nor commit fraud. The AP reports:
A jury in federal court in Brooklyn deliberated about eight hours over two days before finding Ralph Cioffi and Matthew Tannin not guilty of conspiracy and other charges in an alleged scheme that cost 300 investors about $1.6 billion and nearly caused the demise of Bear Stearns itself. The firm avoided bankruptcy in a rescue buyout by JPMorgan Chase & Co.
Both men had been charged with three counts of securities fraud and two counts of wire fraud. Cioffi was also charged with insider trading.
After the verdict, some jurors told reporters that they concluded that the evidence against Cioffi and Tannin was flimsy and contradictory. Other suggested the pair were being blamed for market forces beyond their control.
Having not been in the court room for any of the trial, it certainly would be unfair for me to completely disagree with the decision—especially since it is possible they are not guilty on technical grounds. Nevertheless, I am disappointed by the decision.
To begin with, I certainly don't believe Cioffi and Tannin should be held to account for what is technically not against the law. We should not judge people ex post facto in this country, not matter the distaste. Neither am I in favor of a Wall Street witch hunt, or of the opinion that the court system should be used to mediate cultural justice. But that said, for all practical purposes, Cioffi and Tannin did mislead investors. And that needs to be addressed.
First, Cioffi was not upfront about pulling his own money out of one account that was losing money. He should have told the other investors he did that, and why. If it's not against the law to disclose selling your own stock in a fund while it is losing money rapidly, we should consider something to that effect (provided such a rule didn't create unintended negative consequences).
Second, while Cioffi and Tannin were selling "AAA-rated" securities, the underlying assets of the securities were subprime crap. And it is pretty clear that the fund managers realized this well before communicating anything of the sort to investors. Why else was Tannin so torn up about their investment choices? (This was chronicled in emails from Tannin to Cioffi later published in William Cohan's House of Cards.) And why did Tannin and Cioffi use wives email accounts to discuss problems with the fund? They had knowledge which they did not share. This is a fiduciary responsibility issue.
It's not that they lost money. Sure, they pumped Bear Stearns money into the funds as they were going down, praying for a surge in the marketplace. That is just being bad at your job. But when you mislead investors who are trusting you with their money and you not only refrain from being upfront with them, but pull your own money out in fear of a loss, there is something wrong going on.
It might be that they didn't break a technical law. In which case, the jury should be praised for not letting their emotions get in the way. But Wall Street shouldn't take this jury decision as permission to avoid transparency and disclosure. Wall Street should understand that, in exchange for a (relatively) relaxed and free market, they must obey the letter and spirit of the laws. Corruption, dishonesty, and the use of technicalities are crony capitalism, and do not help to make a prosperous society.