Bear Stearns, Cioffi and Tannin Acquitted

This is absolutely intolerable.

Having been a primary witness to a jury allowing high-class fraudsters off scott free (JDS Uniphase), watching this happen with Bear Stearns gives me real doubt about our judical system, and what it means to be tried before a jury of your peers.

Voir Dire is the process by which juries are selected. It involves some intense questioning of the witness by both parties and the Judge. The answers automatically disqualify jurors in certain cases. If you owned Bear Stearns or JPMorgan stock for instance, you would have been immediately disqualified. It's a necessary process, but sometimes I think the term "peers," is taken too loosely.

Complex financial fraud is incomprehensible. I've been studying Accounting for nearly two years now, and I still don't understand much of it. Maybe I'm an idiot--but consider the following terms and tell me how much you know about each, derivative, mortgage-backed securities, loan loss reserves, credit default swaps, credit default obligations, Credit-default window. How much do you understand about securities? Do you understand the difference between trading securities, available-for-sale securities, and held-to-maturity securities? Do you know what options backdating is? Maybe the call price of an option?

High finance has moved far beyond the realm of what someone who isn't "in the biz" can realistically comprehend. That trial wasn't a jury of peers, but a jury of inanimate objects. All they can look at is the physical. (Times article with Jury consultant, Robert S. Duboff "“Both sides will probably pitch this at a very gut and emotional level, which is how most cases are decided anyway,” Does this man look guilty? Is he crosseyed, or does he look shifty? I mean, the defense ended their closing remarks with a remark addressed to Tannin, "Send this boy back to his family," for chrissakes!

Worse, every poor person in America has the essential belief that he too can be rich someday. So people are sympathetic to the rich. That is--until they can't eat. The Jury made their decision in 6 hours. The JDS jury made their decision in 1 day. There were mountains of documents, literally twenty or thirty boxes of bankers boxes to look at--6 hours? In JDS, Lawyers on both sides spent six years fighting about the case, and you're telling me a fair decision was made in 1 day?

Traditional jurors are not equipped to decide financial fraud. Despite the proliferation (read: inflation) of stock market sales, the only precedent for which occured prior to the Great Depression, still less than 10% of the country will ever buy a stock. Pension plans, Contribution plans be damned. Most of these holdings are managed by professionals and the principals never even see their money. Most of whom have never purchased a stock in their lives, let alone experienced a loss. And the law is strict on juror research. If a juror attempts to gain outside insight on a case--they are promptly thrown out, and either party can seek a mistrial. What hope does the average man have in understanding financial fraud based on two weeks of testimony?

I don't have time to be more coherent. Let me just say: I am incensed. Cioffi and Tannin, weren't the worst of what the financial industry had to offer, they were doing the same thing everybody else in high finance was doing. But someone needs to hang for this. Bernie Madoff was a patsy, a straw man. Ponzi schemes? Illegal, but insignificant precisely because they have always existed. However, when the spirit of an entire profession has been corrupted by greed and willful blindness, (rest assured, Tannin and Cioffi will have great new jobs before the year is over,) then the industry as a whole has to hang out a few examples.

The jury forewoman made the following statement, which closed the Times piece, ‘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.’" That is surely what the defense thought. And given Judge Frederick Block's resistance to try the case, what he thought as well. But it is the point--It's the point exactly. The Bear Stearns Hedgefunds, when they closed, were the bellweather for the entire crash and recession. The industry started to turn things around then--but it was far too late.

I'd like to make one point to the Jury: If a black man shoots someone while making an attempted robbery of $50--he can go to prison for life. That's a nice black and white line because all a juror needs to know is whether or not the man shot the victim. But when two men lose 1.6 billion dollars, there's no brightline for right and wrong. The crime is that these men lost what most other people will never see the thousandth of a percentage because they were over-confident, misinformed, and negligent. Worse, when things started to go south, they lied about it to their investors, in desperate plan to get out before the market blew up. Their negligence destroyed Bear Stearns, and the investment industry as a whole.

Wall Street Journal-When Bad Luck is a Crime

I never read the op-ed page of the WSJ. It's a reasonably good paper, definitely one of the papers of record, but even my nine-year old niece knows it's editorial page is wildly conservative. The insult of the day was penned by Holman Jenkins.

So the Bear Stearns Hedgfund criminal trial against Ralph Cioffi, and Mathew Tannin has been going on since the beginning of the week, and of course, the WSJ has to weigh in, their title: "When Bad Luck is a Crime."

In it Jenkins exonerates Ken Lay, Ken Lewis, Cioffi and Tannin with the pitiable lamentation, of "bad luck." This happens in every financial crime and is a crucial arrow in a defense lawyers quiver. It goes: "Plaintiff's say that there was wrong-doing here, that the defendants wanted to defraud their company and their investors. This is just plain silly. There was a system wide crash--an act of God--all the evidence the plaintiffs have provided actually proves that the defendants did everything in their power to prevent the demise of their company. And really--Defendant A got a 3 million dollar bonus in 2007, was it in his best interest to screw the company?"

I've seen this argument in dozens of securities cases now. It's hackneyed and played out. The problem is that a global economy is so intricately involved that, when the avarice reaches a certain point, one falls, and then the rest of the dominoes get knocked over. Cioffi and Tannin are perfect examples of this. Their hedgefund was at the very top of the stack of dominoes which became the Great Recession. It was one of the earliest signs of the obliteration of the investment bank.

This is one of my favorite sentences, "The Bear Stearns execs, Matthew Tannin and Ralph Cioffi, ran two subprime funds that depended heavily on leverage (i.e., borrowing) to make the rate of return expected by their high-rolling investors. " What a lark! Suddenly "leverage" is just the same as "borrowing," nevermind that the hedge funds here were levraged 30-35 to 1. This is good too: "to make the rate of return expected" those investors really held a gun to Cioffi's head. These sorts of excuses are really shameful coming from the Wall Street Journal.

It makes you realize, that the Paper of Record for the US Economy, really doesn't understand much about law, economics, or plan old business. The investment banking/real estate bubble was extremely reckless. And had not Bernanke, Paulsen and Geithner saved the banking system, we could have had a real problem. And we still do have a huge problem. With all these racial slurs spewing from the polluted mouths of Glen Beck and others, the continued job losses, and the fourth time this year that unemployment benefits have been extended, we could see riots like we saw in the 1960s and 70s all over again.

But I digress.

Jenkin lobs another at the prosecutors by calling their best evidence "The prosecution's pièce de résistance is a Tannin missive that wondered aloud whether they should liquidate the funds or, alternatively, double down on the subprime market. That is, Mr. Tannin was unsure whether he was looking at the mother of all meltdowns or the mother of all buying opportunities." Well, if he was properly hedged to begin with--he wouldn't have been so exposed in the first place.

So what? You can't stand the heat, you say? Well--consider this: Cioffi's hedgefund had the backing of a major investment bank, a bank that had been around for 80 years. Bear in fact, bailed them out, when the size of their losses became unavoidable. Bear Stearns didn't have to do this--they could have left the fund out in the wind. They chose not to. Why? Because their reputation as a successful firm that makes sound investments was on the line. A firm with a reputation for hard dealings doesn't bail out a fund for a half a billion dollars because it was unlucky. Which is why Jenkins begins rhapsodizing about luck and throws in a new paper presented at the Academy of Management, that says: "hard to tell who is competent and who is lucky." Please. The documents support the fact that the fund was hedged poorly, and that it's investment strategy was poor and based almost entirely on the false premise that the housing market would continue to rise, even as every other economic standard for the country continued to drop.

Most disappointing about the WSJ piece is that the writing is pretty crappy. I admit. I don't spend too much time editing my own work on this blog--but I don't get paid for this. They do. Look at these sentences: "How much more fun, when dealing with circumstances like these, to play the after-the-fact-know-it-all, naming heroes and villains with the confidence afforded by the rear-view mirror. Bad enough is when journalists give unreflective vent to this urge, but unhealthy for society is when prosecutors do it." huh?