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Washington Examiner


Jury Rejects Prosecutor's Rigged Game

November 19, 2009

By Marie Gryphon

Far too often, federal prosecutors use ambiguous laws to punish regular businesspeople for their mistakes in judgment. Fortunately, getting actual convictions requires persuading a jury.

Last week, the jury in the first criminal securities case to reach trial in the wake of the subprime mortgage meltdown refused to make scapegoats out of a pair of former Bear Stearns hedge fund managers. Instead, jurors acquitted defendants Ralph Cioffi and Matthew Tannin of all charges related to their frantic efforts in 2007 to prevent their funds from collapsing.

“Juries are very sensitive to [the search for] scapegoats, and they don’t like it,” said former New York Governor and Attorney General Eliot Spitzer, speaking at a Harvard University event last Thursday about the Bear Stearns verdict. In this case, the jury rejected prosecutors’ efforts to transform momentary expressions of fear and doubt into a scheme to defraud investors.

This suggests that, while the public is angry at the finance industry, it is not indiscriminately vengeful.

The case primarily hinged on short excerpts from the defendants’ e-mail conversations about the perilous state of the subprime mortgage markets. According to the New York Times, one such e-mail excerpt stated that the market “looked pretty damn ugly,” and that, if the assumptions underlying a recent report were accurate, “the entire subprime market is toast.” Several days later, Tannin told investors, “we’re very comfortable with where we are.”

But the defense presented a fuller account of the e-mail correspondence between the two men. In context, the two fund managers were reassessing a fluid situation day-by-day rather than the dishonest opportunists depicted by prosecutors.

One juror, Aram Hong, told the New York Times that the defendants had been going back-and-forth between two options: close the funds or look at the flagging market as a buying opportunity.

E-mails represent real-time deliberations more often than settled views. The Bear Stearns jurors wisely declined to play “gotcha” with the instances of momentary pessimism while ignoring similar instances of momentary optimism.

The defendant’s language was viewed in the cultural context of the finance industry, a gritty, hyper-masculine subculture in which profane or inflammatory language is common, according to David Matias, Managing Principal of Vodia Capital in Concord, Mass. “Fund managers often use harsh language, like ’the market is toast’ or ’we’re screwed’ to let off steam in the face of unavoidable market uncertainties,” he said, “These guys were hashing out their views in an unprecedented market event. Of course they were afraid, but a responsible fund manager has to see through the fear in order to provide objective advice to investors.”

These past two years were unprecedented in asset markets. No one imagined an asset market (and especially a real estate market) that would create a “ten-sigma event” -- in layperson terms, a collapse that simply should never happen.

Cioffi and Tannin were justified in their positive guidance because they, like the rest of their industry, believed a meltdown on this scale was impossible.

Mistakes were made and, no doubt, crimes were committed in the run-up to the recent market meltdown, but the public should be relieved by the result in this case. A successful prosecution shouldn’t be based on the emotions and deliberations of the moment - otherwise, it would chill deliberation itself in the financial industry.

Original Source:



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