The Enronization of Bear

The government is considering criminal charges against Bear hedge fund managers Ralph Cioffi and Matthew Tannin for being overly optimistic about the health of their funds (WSJ).

As Tom K has pointed out (and see my post on this) this scenario was shades of Enron – the swift collapse of a trust-based business. Here the “truth” may be particularly elusive. What in retrospect seems to be appropriate pessimism might have caused an unnecessary bank run. This sort of case is suited for a civil fraud claim, but not a criminal case. Note, too, that the sophisticated hedge fund investors were a far cry from the public investors and employees imperiled in Enron.

Of course what’s really happening here is that the hedge fund managers are taking the fall for the collapse of Bear, and the even broader reverberations from that, including the controversial merger, the bailout and the credit markets’ woes.

As with Enron, the public is screaming for action.  When in doubt, throw somebody in jail. The public will eventually calm down, by which time the now impoverished defendants will be in jail or being exonerated on appeal.

Beyond the politics there is the gross unfairness of the corporate crime lottery. Wrongful misrepresentations of this sort usually land you in a civil case. But if you stumble into a national disaster you end up in jail.

The hedge fund managers also had the bad luck of their chosen line of work, as distinguished, say, from being corporate executives. Remember that Bear’s Alan Schwartz said on the eve of the collapse “we don’t see any pressure on our liquidity, let alone a liquidity crisis.” He's lucky that he didn't head up a hedge fund, or that he wasn't Lay or Skilling. As I've often said, Steve Jobs was a beneficiary of this sort of calculus in the backdating fuss.

Anyway, get ready for another misguided high-profile corporate criminal prosecution.

Comments

[Jonathan Pollard]

Actually, Cioffi and Tannin are hardly the "fall guys" for Bear Stearns. They cooked up the entire scheme themselves and had complete autonomy over the High Grade Overseas Fund and the High Grade "Enhanced" Overseas Fund. Look up the circumstances surrounding the creation of 1) the second fund and 2) Everquest. Yes, the bigger Bears (i.e. Spector) had final oversight as head of BSAM, but the funds scheme was orchestrated by Cioffi.

I covered all of this for the Hedge Fund Law Report.

[Larry Ribstein]

Of course Cioffi and Tannin were in charge. But according to the WSJ report, the pending indictment is based on disclosure -- similar to Lay and Skilling -- not theft. Even if their bad business judgments single-handedly brought down Bear, that should not be a criminal offense.