Once again, the Securities and Exchange Commission (SEC) has embarrassed itself. Last week it let off the hook two hotshot former Wall Street hedge-fund managers who lost a bundle for the investors trusting them to manage their money responsibly.
Instead of going to court on February 13 and laying bear the sordid facts for a jury, at the last minute the SEC settled a civil suit against Ralph Cioffi and Matthew Tannin of the now defunct Bear Stearns.
These were the hedge-fund managers who five years ago loaded up their two funds with billions of dollars of lousy mortgage-backed securities and collateralised-debt obligations, leveraged them to the hilt and, when the market for the securities soured in July 2007, liquidated the funds.
According to the SEC's 2008 civil complaint against the men, the collapse of the funds cost investors at least $1.6 billion. These problems were among the very first indications that serious trouble was looming in the housing market and securities tied to it. The liquidation of the two funds led to the effective bankruptcy of Bear Stearns itself in March 2008 and the subsequent financial crisis that nearly wiped Wall Street off the face of the earth. But the price the SEC extracted from Cioffi and Tannin as part of a settlement — after previously telling the court it intended to go to trial — was a mere pittance, "chump change," according to the judge in Brooklyn overseeing the case.
Victory for lawyers
Cioffi, who made $22 million (Dh80.78 million) in 2005 and 2006 at Bear Stearns, will pay $800,000 and agree to a three-year ban from the securities industry. Tannin, who was paid $4.4 million in his last two years at Bear, will pay $250,000 and agree to a two-year ban. Neither has to admit to wrongdoing.
In combination with their November 2009 jury acquittal on criminal charges in federal court, the SEC civil settlement provides a major victory for the defendants' attorneys, Hughes Hubbard & Reed LLP (for Cioffi) and Brune & Richard LLP (for Tannin). The American public, on the other hand, is left with the trillion-dollar bill.
This outcome is beyond outrageous. In its complaint, the SEC flat-out stated that Cioffi and Tannin mislead their investors: "Particularly during the first five months of 2007, as the funds suffered increasing losses to the value of their portfolios and faced growing margin calls and redemptions senior portfolio manager Cioffi and portfolio manager Tannin deceived their own investors, as well as the funds' institutional counterparties, by fraudulently concealing from them the full extent of the funds' deepening troubles."
One of the ways Cioffi and Tannin did this was by displaying, graphically, on the monthly account statements the percentage of the funds invested in subprime mortgages.
For instance, according to an investor's statement from March 2007, the amount of the funds invested in subprime mortgages was stated clearly as 6 per cent. But when the funds blew up, Bear Stearns created internal "talking points" memos for how to deal with investor complaints.
A memo from June 2007 pointed out that one of the questions deemed likely to be asked was: "I thought the fund was diversified, and now it turns out it seems to have had a fair amount of exposure to the subprime mortgage market. What exactly was the exposure?" The answer: "60 per cent."
In other words, Cioffi and Tannin told their investors the funds were diversified — and raised billions of dollars based on that representation — but in reality they were highly concentrated in subprime mortgages. And now, thanks to the SEC's settlement, the two men may never even be held remotely accountable.
John Worland, the SEC's attorney, defended the agency by saying that it has no ability to sue for damages, only for the disgorgement of ill-gotten gains. Then Worland delivered this stunner: "Neither Mr Cioffi or Mr Tannin got rich."
We are all worse off for the SEC's continued lax enforcement of wrongdoing on Wall Street. If it won't protect us from charlatans, who will? Judge Block, please deny the proposed pathetic settlement and send the parties back to the negotiating table or, even better, your court room