The Chilling Effect Of The Bear Stearns Prosecution

Posted by John Carney, Jun 24, 2008, 8:46am

At the heart of the indictment of former Bear Stearns hedge fund managers Matthew Tannin and Ralph Cioffi is an email exchange in which Tannin questioned the performance of the funds. Federal prosecutors are treating those those emails as the smoking gun in the case against them, saying the men privately knew the funds were in trouble while they publicly reassured investors that the funds were healthy. At least one former prosecutors has described the email exchange between the two men as "dumbfounding."

Of course, the exchange could also be read as exculpatory. As far as we can tell, the emails detail a discussion about fund performance and strategy and do not discuss attempts to deceive investors. The junior Tannin was nervous. His boss Cioffi instructs him to hold steady. These are the kind of frank and open discussions investors should hope occurs between those entrusted to manage their money. But this case seems likely to make those discussions too dangerous to hold.

The prosecution of these two Bear Stearns executives offers a bad lesson for Wall Street: If you have doubts about your strategy or returns, never put it in an email.


4Recommend this! 32Comments
Posted in: Bear Stearns
Tags: indictment, Matthew Tannin, prosecutors, Ralph Cioffi

Comments

1

Posted by guest, Jun 24, 2008 9:03AM

Please, please, please start proofreading your posts.

2

Posted by guest, Jun 24, 2008 9:08AM

"But this case seems likely to make those exchanges less likely."

less likely in email form - but they can, um, TALK - like in person,,,,yeah, that may work.

just DONT PUT IT IN WRITING! very simple

3

Posted by guest, Jun 24, 2008 9:27AM

"These are the kind of frank and open discussions investors should hope occurs between those entrusted to manage their money."

Carney, no one is saying to stop having these discussions, whether in email or in-person, but the point is to disclose full and accurate information. Those who owe a duty to investors should not have discussions that an investment sucks and then tell investors that the investments are the greatest thing since they started slicing bread.

4

Posted by guest, Jun 24, 2008 9:37AM

@9:27,

My thoughts exactly.

5

Posted by guest, Jun 24, 2008 9:42AM


Simply because a junior manager has uneasiness about a strategy doesn't mean that there was a deliberate intent to deceive investors. When I worked at a hedge fund, there were times that I had doubts about the chief trader's current positions but that didn't stop me from telling investors that I believed the fund was a good long-term investment. If we subseuqently had a down month because those positions went south, did that mean that I lied to investors? No.

Apart from the typos, I think this was a good post.

6

Posted by guest, Jun 24, 2008 9:49AM

Carney, so what? As others have said either have these conversations in person, or have your company establish a basic email retention policy--everything's deleted after 30 days, no exceptions. that would take care of the problem.

7

Posted by guest, Jun 24, 2008 9:51AM

i was thinking that openly debating whether to tell your investors that the fund was down 6.50% versus 18.97% was against the rules.

but i am conservative in these matters.

8

Posted by guest, Jun 24, 2008 9:56AM

Weren't the most damning emails sent via their wives' email accounts? Or did I dream that?

9

Posted by guest, Jun 24, 2008 10:06AM

I love ya, John-boy, but you're giving the benefit of the doubt to the wrong side here. Knowingly withholding material information from, and then giving misleading information to, investors (even accredited ones) is simple fraud. Plain and simple.

10

Posted by guest, Jun 24, 2008 10:21AM

I hope that these folks are always questioning how things might play out, which will always include considering potential bad outcomes. That's called stress-testing. No one can predict the future, but good managers are always considering the bad scenarios in order to test whether they have things covered or hedged, or have an exit strategy. And on a team, you'll have different opinions, some negative and some positive. But now, as Carney notes, who is going to do this when such discussions might lead to portions of these very same discussions being presented to a jury, which won't know a thing about all this, by some thug prosecutor looking for a name and/or a job in a private sector law firm?

11

Posted by Capt Obvious, Jun 24, 2008 10:23AM

these 2 were a little on the shady side- but prosecutors should be consistent - if you throw the book at them - then said book should be thrown at anyone who has ever managed OPM -
setting a dangerous precedent here

12

Posted by guest, Jun 24, 2008 10:25AM

Capt Obvious - agreed

13

Posted by guest, Jun 24, 2008 10:31AM

Great point. If it comes out that Hillary knew her campaign was in trouble while reassuring the public things were ok, should she be arrested too?

14

Posted by guest, Jun 24, 2008 10:37AM

10:31's point great too. How about Bush, looking at any and all points in time these past few years, and his predictions about Iraq?

15

Posted by guest, Jun 24, 2008 10:37AM

How about a new rule- absolutely nothing in writing ever...

no calls on traceable lines...

F** me the sopranos come to the fund management business!!!!!

My2Cents

16

Posted by guest, Jun 24, 2008 10:39AM

When are people going to learn that even seemingly harmless conversations via email can come back and bite them in the ars? Anything in writing should be considered evidence, regardless of how simple or harmless it looks. Sucks for them to go through but I expect they'll be let go.

17

Posted by guest, Jun 24, 2008 10:48AM

10:39 is too confident that justice will be done. It's not just what's in writing, it's also what the prosecutors will get their witnesses to say -- for example the ones, who during the stress-testing discussions mentioned in the 10:21 comment, expressed negative opinions about the future -- and the silence they'll get from those they'll scare into shutting up. The disgusting perp-walks were the just the beginning of the travesty.

18

Posted by guest, Jun 24, 2008 10:53AM

Recall the name of the fund in question:

Bear Stearns High-Grade Structured Credit Strategies

Suppose your firm starts a fund and tell investors it will track the SPX. Then, you all decide (well, the smartie pants tell you) to buy puts on ED1.

Of course, your investors would have made out quite nicely (02 -07) and may not have known or cared about your 'strategy'. Then, around Aug 07 you start to see your fund isn't working so well and start to talk about it with management.

That is the type of discussion that are in question. Not individual trades, but rather that the entire strategy was broken.

I imagine the SEC will need to prove that BS knew their strategy (packaging Junk Bonds as AAA paper) was not working, nor was it going to work.

19

Posted by counterclockwise, Jun 24, 2008 11:02AM

Someone mention the perp walks? Watching the perp walks for Cioffi and Tannin has changed my mind forever about perp walks for people indicted for felonies that are not a threat to public safety. The only reason those perp walks were done was to parade the men in handcuffs in front of the cameras. If those indicted turn out to be innocent, there is nothing that can be done to undo the humiliation of that experience. It is punishment without due process of law. It also has a touch of Singapore-type justice that is incompatible with our values and our criminal justice system.

20

Posted by guest, Jun 24, 2008 11:22AM

The perp walks will also make it tougher for these fellows to get a fair shake by a fair jury. It's shameful. So it's not just that there won't be anything that can be done about the humiliation if and when they are found innocent. It's makes the chances of that outcome less likely.

21

Posted by guest, Jun 24, 2008 11:36AM

The point here is that the securities laws imposed a duty on these guys and these guys guys brached that duty by disclosing materially false information. We may not agree with the law and rules but we all still must abide by them. Again, those charged with a duty to investors, when they choose to make a disclosure the information has to be true or those disclosing must have some reasonable belief in its accuracy. These guys, obviously, did not believe in the accuracy of the info they were peddling. I understand that making money on the street means possessing the ability to sell ice to Eskimos but this has to be done within the law.

22

Posted by guest, Jun 24, 2008 11:37AM

The point here is that the securities laws imposed a duty on these guys and these guys breached that duty by disclosing materially false information. We may not agree with the law and rules but we all still must abide by them. Again, those charged with a duty to investors, when they choose to make a disclosure the information has to be true or those disclosing must have some reasonable belief in its accuracy. These guys, obviously, did not believe in the accuracy of the info they were peddling. I understand that making money on the street means possessing the ability to sell ice to Eskimos but this has to be done within the law.

23

Posted by Billy Ray Human, Jun 24, 2008 11:43AM

There is definitely a fine line in fund management, but these guys crossed it. If Bear hadn't gone down they would not be in this position.

Let's talk about the perp walk, though. What was Cioffi wearing? They pulled him out of his house first thing in the morning and he has a sport coat and button up shirt working? I guess they let him get dressed before they took him down.

24

Posted by guest, Jun 24, 2008 11:43AM

regarding the perp walk causing humiliation and damage - that was the point. regarding the perp walk making it tougher to get a fair shake - that was the point. the prosecutor was deliberately doing this to improve the odds of success for his case by poisoning the jury pool and by weakening the resolve of the accused. the prosecutor probably learned this this technique from eliot spitzer and rudy guiliani.
also, where did that perp walk take place? was it as they were taken from their offices? isn't that a little odd?
of course it is - and it was part of a deliberate strategy. this is just the first step of criminalizing all sorts of things that were commonplace in 2007. guess where it will end...

25

Posted by Anal_yst, Jun 24, 2008 12:26PM

Someone correct me if I'm wrong, but I remember reading that Cioffi (in at least 1 of the funds in question) had a large, short-ABX bet on, but the fund "ran out of liquidity" before the trade could pan out.

26

Posted by guest, Jun 24, 2008 1:23PM

Cioffi and Tannin arranged to turn themselves in. They weren't taken from their homes. They were dressed the way they wanted to be for what they knew was coming. They met the federal law enforcement folks at a prearranged location, and then they were put in handcuffs and paraded before the cameras. If it would have been allowed, they could have just as easily met the feds at the first courthouse location and gone in together, which is the way it was done in white collar cases before Giuliani.

It is correct that Giuliani began this horrible tradition. He liked to go to the individual's workplace and take the individual out in handcuffs, in front of all of his co-workers. This happened in one well-known case in which the individual was exonerated.

Spitzer liked the media-worthiness of the practice and also the pandering to those in the public who have a certain degree of blood-lust. He did it, too.

The basic legal objection is that it undercuts the presumption of innocence.

I think it's time this practice was stopped.

27

Posted by guest, Jun 24, 2008 2:35PM

Never put it in writing or on the web. Electronic documents are forever. The one month retention policy? If only. People always keep additional copies of things. The worst situation is to have documents floating around that YOU don't know about.

The other 'lesson learned' for the zillionth time is that a spectacular failure is going to draw heat, regardless.

Attempts to CYA don't work if the failure large and public.

They should be teaching this stuff in business school. Or maybe people just need to get a brain.

28

Posted by Anal_yst, Jun 24, 2008 2:41PM

What is it that they tell you on day 2 of training when you 1st get hired?

Never put it in writing (or email) if you wouldn't be ok seeing it on the front page of the WSJ.

I feel like these guys would have been fine if Cioffi had told investors frankly that they thought the portfolio was sound, but that they were taking additional steps to protect against the possibility of a downturn (or something to that effect). As far as I've read, his only real error (besides crappy investing) was only representing the good, while failing to acknowledge any possibility of the bad. (and someone please, again, correct me if I'm wrong)

29

Posted by guest, Jun 24, 2008 2:43PM

"Spitzer liked the media-worthiness of the practice and also the pandering to those in the public who have a certain degree of blood-lust. He did it, too."

The guy was totally ruthless. Yea, two wrongs don't make a right, and yea, it's only rough justice. But as long as we are stripping everyone of privacy and freedom, why not make it a crime to take a few thousand out of your bank account.

I suppose the problem is that Elliot was too cheap to put some real distance between himself and his little vices. $5000 for a hooker, a felony. $500,000 for a proper kept woman, priceless.

30

Posted by guest, Jun 24, 2008 5:35PM

Maybe the complete Bear Stearns email archive will be placed online and made searchable as was done with Enron. Could be some interesting stuff to be found in employee's personal emails.

31

Posted by Finnegan, Jun 24, 2008 10:22PM

I don't know. Commit any other crime and the cops will be at your door, you in cuffs, and in front of your neighbors and family, possibly even half dressed... so.

On Wall Street this type of thing goes with the territory. Not like it never happened before. They will get good lawyers, argue their case, and life goes on.

32

Posted by guest, Jun 25, 2008 2:24PM

Anal_yst, others ...

In a word (okay, two), it comes down to arrogance and narcissim.

In this day and age, every company gives you the mantra on DAY 1 -- Never put it in writing (or email) if you wouldn't be ok seeing it on the front page of the WSJ. Or something close to that effect.

The trouble is, the BSD's (Big Swinging Dicks) think the rules only apply to the "little people" ... sort of like how JaCayne got away with smoking his fricking cigars in his office when NYC has a clear no smoking policy.

Another case in point, a certain lap-band loving, movie-blogging, skirt-chasing (perish that image) CEO of a now-defunct asset management company that shall rename nameless (hint - rhymes with GSAM)was specifically told to not blog using his company email address and that he was in violation of the firm's electronic communications policy.

He ignored this guidance as nonsense and blogged his way into WSJ infamy.

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