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Jury Finds That Guys Who Said “We intend to protect the NAV on the Primary Fund to whatever degree is required” Were Entitled To Change Their MindsBy Matt Levine
- Get people to invest their money with you and then lose it all because you’re unlucky, reckless, an idiot, an unlucky reckless idiot, etc.
And here is a thing that it is not okay to do:
- Lie to them about it.
That’s pretty much that!1 But it’s easy to lose track of the difference, especially if you or your loved ones or your financial system lost all their money through the good efforts of reckless idiots. The Journal had a whole package of like “why aren’t more reckless idiots in jail???” today, spurred mostly by the pending SEC settlement in which JPMorgan will pay a ton of money over mortgage fraud but no individual humans will be charged with having committed mortgage fraud; the mortgage fraud was, like, in the system.2 It bears pondering.
Nonetheless: the law is the law, and in its majesty has decreed that reckless idiocy = okay, lying about it = not. Where does that leave Bruce Bent Sr. and his son Bruce Bent II? BB Sr. invented money market funds, which I guess some people would say qualifies as reckless idiocy all by itself, but anyway he and BB2 ran the Reserve Primary money market fund and it invested in Lehman debt and lost a bunch of money and they were arguably not totally forthcoming about it and the SEC sued them for fraud. Today a jury more or less decided that they didn’t lie about it:
Former money-market mutual-fund co-managers Bruce Bent Sr. and Bruce Bent II were cleared of intentional fraud in a federal civil trial on Monday, in a high-profile defeat for the Securities and Exchange Commission in claims stemming from the financial crisis.
Mr. Bent and his son managed the $62 billion Reserve Primary Fund, which “broke the buck” in September 2008 by falling under the $1-per-share value that money funds seek to maintain, sparking a panic that spread to other money funds.
The jury found Mr. Bent II liable on one claim of negligence.
You can read the SEC’s complaint here and the jury instructions here; honestly after reading the complaint and nothing else you’d probably let them off too. There’s a lot of “when things got bad, they didn’t run around screaming ‘PANIC’ to all their investors,” but that is not actually a thing that you’re required to do though I suppose it’s a nice courtesy to the investors who get out first.3 But there’s not a lot of actual untrue things that they said to investors. The worst they did was tell investors and trustees that they intended to enter into a support agreement – i.e. agree to put up their own personal money to prevent Reserve Primary from breaking the buck – but then didn’t actually do that. But, y’know, intents can change, rapidly. You might very reasonably intend to enter into a standby agreement that will keep your fund afloat and render it unnecessary for you to actually come up with any money; once it’s already broken the buck, you could very reasonably have rather less intent to actually fling all of your personal money onto the bonfire you’ve made of your investors’ money.
The real worst thing they did was, of course, light those investors’ money on fire, though this being the unexciting-til-it-isn’t world of money market funds that means losing more than one-half of one percent of their investment, which, man, go tell your troubles to the CPDO guys.4 If you think of money market funds as boring 99.5% of the time, and likely to bring down the world financial system the other 0.5% of the time, you can understand why the SEC was keen on bringing this case against a fund that broke the buck and was at least a little shady about it. But, again, any amount of client-money-immolation isn’t fraud – though I guess it’s one count of negligence? – so you can see why a jury let them off.
The SEC has had a rough time with fraud cases and juries; remember Brian Stoker, the Citi banker whom the SEC sued for CDO fraud? He won his trial, but the jury sent the SEC a nice note saying “This verdict should not deter the S.E.C. from investigating the financial industry and current regulations and modify existing regulations as necessary.”
And look how encouraged they were for the Bent case. And look how that worked out. One conclusion you could draw is that the SEC will be hesitant to bring otherwise compelling fraud cases against individuals, because silly juries keep ruling in favor of those individuals, perhaps seduced by those individuals’ flowing locks or grandfatherly charm or what have you. Another possibility, though, is that there was rather less fraud than everyone wants there to be: that a lot of financial-crisis villains were bumbling around in good, or good-ish, or mediocre, faith, rather than cackling gleefully over their intentional fraud.5 And while that bumbling is not great for, well, really for anyone, it’s also not against the law.
1. NO IT ISN’T! Don’t do anything! Be safe out there.
“We have now the greatest epidemic of elite white-collar crime in the history of the world, and we have absolutely not a single individual who was actually elite and large in causing this crisis in prison or even credibly threatened with imprisonment,” said Mr. Black.
Much of the SEC’s scrutiny of mortgage-backed securities centers on whether investors were misled about the quality of the loans. But the paperwork for these deals at J.P. Morgan and other firms usually was heavily vetted by in-house lawyers, making it hard to show anyone intended to commit fraud, said the people close to the investigations.
3. Not so much to those who get out last though.
5. Alternate theory: they were cackling with their lawyers.