It’s hard to imagine that for all the misinformation spread from the senior ranks of Wall Street about the alleged health of the financial business during the run-up to last year’s meltdown, the best our regulators and prosecutors can come up with as “culprits” for this abuse is two measly hedge fund-managers.
“I haven’t heard a thing about these cases in months,” said one prominent white-collar attorney, “and usually when there are active investigations, my firm sees the action front and center.”
But that’s exactly what our government has produced so far on the one-year anniversary of Lehman Brothers’ bankruptcy and the government bailout to save the country’s financial system—a pair of hedge-fund managers whose role in the greatest financial debacle of our time was minimal at best.
And my bet is that there won’t be that many more.
• Charlie Gasparino: Stop the Bailouts • 6 Meltdown Winners That’s right, Ralph Cioffi and Matthew Tannin, the guys who ran a pair of Bear Stearns hedge funds that purchased risky mortgage bonds, are likely to go to jail, while the CEOs and other top executives at some of the firms at the heart of the financial implosion, including those at Lehman Brothers, Citigroup, Merrill Lynch, and Bear Stearns, could face little more than a slap on the wrist from the Securities and Exchange Commission, if that, based on what I’m hearing from white-collar attorneys with knowledge of these cases.
They tell me there is a strange lack of interest in, for example, statements coming from senior executives at Bear, including its former CEO Alan Schwartz, that things were fine at Bear just before the firm imploded back in March 2008. The same goes for the alarmingly positive spin of top executives at both Citigroup and Merrill Lynch back in the summer of 2007, just before both firms had to ’fess up to their holdings of toxic mortgage debt and reveal massive losses.
Lehman Brothers is front and center in the news these days, because it is the one-year anniversary of its implosion. And yet the once-wide-ranging investigations by the U.S. attorney’s office and the SEC into whether senior Lehman executives such as CEO Dick Fuld and former CFO Erin Callan misled investors when the firm was wobbling last year seem to have hit a wall as well.
The executives, of course, have denied wrongdoing. Their statements, they contend, were based on their firmly held beliefs about the condition of their companies and the best information available. But if you were an investor in any one of these banks, the best information wasn’t good enough. Investors lost big money last year listening to the Wall Street elite defend their firms just before their companies folded because investors often buy stock on official company pronouncements of financial health.
For that reason, you would think that regulators and prosecutors would spare no expense—just as they’ve done with the investigation of Cioffi and Tannin—to get to the bottom of these matters. But according to people with knowledge of the matter, these cases seem to be in limbo.
“I haven’t heard a thing about these cases in months,” said one prominent white-collar attorney, “and usually when there are active investigations, my firm sees the action front and center.”
Of course, that doesn’t mean the cases are completely dead; investigators may be merely weighing the evidence before filing charges. But I doubt it, and so do many of the attorneys I speak to who work in the white-collar crime business. Such lags usually mean that prosecutors and investigators have moved on to other things they believe are more important now, or they haven’t been able to come up with the evidence necessary to file fraud charges.
And that would be a shame. Not that I want innocent people charged merely to satisfy some vendetta against Wall Street. But in a few weeks, as their criminal fraud trial begins, Cioffi and Tannin will become the poster children of the financial debacle, and their case will be one of the biggest examples of prosecutorial overkill in a long time.
For all the hoopla over their hedge funds, Cioffi and Tannin ran an operation that at its height was worth not much more than a couple of billion dollars. But the combined investor losses tied to the demise of Bear, Lehman, Citigroup, and Merrill are in the hundreds of billions of dollars.
To be sure, the case against Cioffi and Tannin, such as it is, has some noteworthy elements. There is little doubt that the implosion of the Cioffi-Tannin hedge funds has symbolic value; the funds’ demise is widely regarded as the prime catalysts of the Wall Street financial crisis. Meanwhile, the basis of the charge is that as Cioffi and Tannin were telling investors they believed the housing market would recover—and so would their funds’ investments in this sector: bonds tied to residential real estate—they actually believed just the opposite was true. In effect, prosecutors are saying the two lied to keep people from bailing out of the fund, hoping that the market would turn around. When it didn’t, their customers lost lots of money relying on their allegedly phony advice. Bolstering the prosecutors’ case are emails from both men suggesting that they really didn’t think the market was poised to come back. When you say one thing but believe something else, that’s called fraud, and it could mean years in jail for both men.
Attorneys for Cioffi and Tannin offer a different take—that their clients were true believers in the housing market, and their clients’ emails have been taken grossly out of context.
Maybe so, but even if you believe these guys should be thrown in jail immediately, consider this: There had been an active investigation of a larger case against Bear and senior executives into whether they misled the public about the firm’s financial condition just before the firm imploded. Then, according to people close to the inquiry, investigators seemed to have lost interest and began turning up the heat on Cioffi and Tannin. Again, maybe the feds found nothing wrong with Alan Schwartz’s now famous statements to the public and on CNBC defending Bear’s strong “liquidity” despite massive selling of the company’s stock and the run on the bank as investors yanked money out of their accounts at Bear.
But I’d like to know what exactly made Schwartz and his CFO Sam Molinaro—who made similar statements at the time—believe everything was hunky dory when investors thought the place was falling apart?
Let’s hope investigators combed through their emails as diligently as Cioffi’s and Tannin’s.
On Wednesday I spoke with a number of white-collar attorneys who said they believed these potentially larger cases didn’t receive the same diligent attention from investigators that the one against Cioffi and Tannin apparently did in part because:
Regulators and prosecutors may believe the positive spin, even in the face of countervailing evidence, isn’t fraud but simply a standard business practice across Wall Street when things go bad. “There is a feeling, I think, of ‘What are they going to say?’” said one white-collar attorney. “If they don’t spin the most positive story, they will make a bad situation even worse. People will keep unloading shares of their company’s stock and they won’t be able to borrow money to finance their business. So they get a break.”
Another rationale: The federal government is now a major shareholder in many of the banks, like Citigroup and Bank of America, that bought Merrill Lynch. So by bringing charges against the banks for issuing allegedly false information, the feds would be penalizing themselves.
Maybe that’s why the SEC recently fined Bank of America a measly $33 million for issuing allegedly false statements about bonuses paid to Merrill Lynch after its purchase.
Regulators and prosecutors also love easy targets, and Cioffi and Tannin are pretty low-hanging fruit. Their funds were the first casualty of the financial crisis, and the case had tremendous headline value, at least at the time it was brought, in the middle of 2008, before the financial crisis ran its course.
Finally, and maybe the biggest reason: Investigators just can’t make these bigger cases. Proving fraud is notoriously difficult. People can’t be indicted for stupidity or irrational exuberance, and Dick Fuld, Alan Schwartz, and the rest of the Wall Street executives who assured us all that everything was OK when it wasn’t may be dumb, but not corrupt. Let’s just hope Ralph Cioffi and Matt Tannin were prosecuted under the same standards.
Charles Gasparino is CNBC's on-air editor and appears as a daily member of CNBC's ensemble. He is a columnist for the Daily Beast and a frequent contributor to the New York Post, Forbes, and other publications. His forthcoming book about the financial crisis, The Sellout, is scheduled to be published later in 2009.