The Indictment

On June 18, 2008, the government filed an indictment in US District Court for the Eastern District of New York against Ralph Cioffi and Matthew Tannin, the two former hedge fund managers at Bear Stearns. This post is an attempt to put into English what the government is attempting to do.

The defendants are charged with violating:

1. 15 USC Sections 78j(b) and 78ff. The are the sections of the US Code that charge securities fraud.

2. 18 USC Section 371...Conspiracy to commit an offense

3. 18 USC Section 1343...Fraud by wire, radio or television

4. 18 USC Section 2...charging them as principals

5. 18 USC Section 981...forfeiture allegations

6. 18 USC Section 3551...If guilty, imprisonment

7. 21 USC Section 853(p)...if guilty, forfeiture of substitute property

8. 28 USC 2461(c)...the government's power to enforce forfeiture

They are the sections of the US Code that Cioffi and Tannin allegedly violated.

If you are paying attention by this point, you will have noticed that the "violations" of 2 through 8 enumerated above are all predicated upon a crime having been committed. In other words, 2 through 8 require a crime to have been committed in order for them to come into play. The only allegation of a crime is 1, an allegation of securities fraud.

In order for there to be securities fraud, a security must have been offered, purchased or sold at a price that is not market value. There is no ambiguity, no gray area, no innuendo. A security must have been offered, purchased or sold at a fraudulent price.

You can guess what the indictment is missing...that fraudulent price.

Instead, the indictment states that the total losses in the funds exceeded $1 billion. The indictment does not claim that the defendants took the money or that they profited by that amount.

If the government is successful in its prosecution, and considering the blood lust it is creating, it probably will be successful, these two men will spend the rest of their lives in prison. Plus, they and their families will be left destitute.

More later.

They did it

They actually did it. They indicted and arrested the two hedge fund managers for the Bear Stearns hedge funds, Ralph Cioffi and Matthew Tannin. For those of you interested, a copy of the indictment is available from The New York Times.

I just downloaded a copy and will be posting an analysis in the near future. However, based upon what I read so far, this is not going to be an easy case for the government. That is assuming the defendants will be allowed to defend themselves.

The only comment I will make now is this is a day that most investment advisers had been hoping would not come. What the government is saying by instituting this action is if you lose client funds you can be sent to prison even if you did not profit.

The effect is chilling.

Indict the Bastards!!

Can you imagine! Someone actually lost money in a hedge fund! And now the cry goes up to indict the money managers, have some sort of trial or better yet a plea bargain, then throw the bastards in jail.

I promised myself when I started this blog that I would not rant about the legal system. But yesterday's Wall Street Journal really got to me.

On the front page was an article about the two Bear Stearns hedge fund managers facing a possible indictment. Why? Because they had the audacity to "paint a rosy" picture of their funds. In case you missed the article, it is available from The Wall Street Journal.

Ralph Cioffi and Matthew Tannin were the managers of "two high-profile bond portfolios." According to the Journal, they could be indicted within the next week.

Having been there and faced the same problems, I have only one piece of advice. Fight this as much as you possibly can. Do not entertain a plea bargain nor be cooperative in any respect. These people are out for a trophy, and you are the target.

Accusations of painting a rosy picture of the fund are hollow at best. I guess they would have you paint a bleak picture of the outlook so the run on the bank could have started sooner with the same results.

Painting a rosy picture of an enterprise is not illegal, if you believe the picture. Unless it can be proven that you offered, purchased or sold a security at non-market prices or that your actions caused a security to be offered, purchased or sold at non-market prices, a fair and impartial judge must dismiss any indictment presented.

Good Luck.

Too little too late

Last week I was looking over the headlines at Market Watch for interesting articles about changes in municipal finance. What really looked out of place was a piece written by Alistar Barr titled  Regulators try to ease selling pressure on muni's.

The fact that this article ran on June 2, 2008 begs the question where has the National Association of Insurance Commissioners been for the last eight months!

On October 13, 2007, Penn State was trouncing Wisconsin 38 to 7. AMBAC's stock price had closed the prior day at 68.96, down from a high of 96. But anyone who was aware of the financial markets knew the monoline insurance companies were in serious trouble. You don't lose a third of your market capitalization without some sort of alarm going off.

The National Association of Insurance Commissioners did nothing.

Fast forward to January 1, 2008. AMBAC's stock price has now fallen to 26, having lost about 75% of its market value in less than a year. And Wisconsin was on the losing end in the game with Tennessee.

By now everyone knows there are major problems with municipal bond insurance companies. The market for municipal bonds is freezing. Liquidity is vanishing.

The National Association of Insurance Commissioners did nothing.

But here on June 2, 2008, we are to believe that the Association is going to save the day by assigning its own credit ratings through its Securities Valuation Office ("SVO").

Just think of how much more credible the action would have been had the Association made its announcement in October. Better yet, how about a decade ago.

I'm sure the market awaits the time when the SVO assigns a rating to a municipal issue higher than the rating given by Moody's or S&P. Maybe it's time for a little long range planning on the part of the Association.