Two Bear Stearns Big Shots Arrested

Yesterday, the FBI arrested former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin. The pair were at the top of two funds involved in sub-prime mortgages that collapsed, Reuters reporting “Cioffi was a senior portfolio manager of the two funds that collapsed and Tannin served as his chief operating officer.” At very least, they botched things badly, as evidenced by the failure of the funds. However, it looks much worse than that.

This journal believes that the presumption of innocence is one of the cornerstones of justice. Therefore, one must stress that nothing has been proved in court, that the evidence disclosed in the media may be inaccurate, explainable, or even non-existent. Determining if a law had been broken is the purpose of a trial, and the two men are entitled to their day in court. Susan Brune, a lawyer for Mr. Tannin, may well have been right when she said that her client, “is being made a scapegoat for a widespread market crisis.”

Bloomberg reports, though, “Cioffi allegedly pulled the $2 million of his own money, one third of the amount he'd invested in one of the funds, before March 2007, so he could commit it to another fund he set up, said a person familiar with the investigation. The withdrawal occurred before the funds ran into trouble, the person said.” The prosecution will have to prove that he had knowledge of his funds impending collapse, which as portfolio manager he could well have.

Kate Kelly of the Wall Street Journal wrote, “The indictments of two former Bear Stearns Cos. hedge-fund managers are expected to cite a personal email sent from one to the other suggesting that the funds were headed for the rocks -- four days before they told investors there was little to worry about.”

What changed in those four days was a three hour meeting in which Mr. Tannin was persuaded that things weren’t as bad as he thought. Ms. Kelly reported, “During the three-hour meeting, Mr. Cioffi and a third colleague persuaded Mr. Tannin that he was overreacting to the statistics, say people familiar with their version of events. Mr. Cioffi argued that the funds were expected to soon close on a new financing agreement with a large bank, these people say; therefore, the funds were well-positioned to invest in only the highest-quality bonds. Mr. Cioffi acknowledged that no one could ever predict market events with certainty, but said Mr. Tannin had reason to feel confident.”

If these men are guilty, one hopes that the prosecutions don’t end with them. If they are innocent, then one hopes the prosecutors find those who aren’t. The collapse of an institution like Bear Stearns couldn’t have come about if the regulations and laws were followed.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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