Analysis of the Indictment

The indictment filed against Cioffi and Tannin appears to be a further step in the ongoing effort on the part of employees of the Department of Justice to thoroughly punish those whose businesses fail resulting in the loss of investor funds. Despite the opinions of all the "experts" on CNBC or the members of the press or any other members of the blogging community, what the government is attempting to accomplish here is not in the best interests of either the investing community, business owners or investment advisors.

A case can be made that if the government should be successful in this prosecution, the result will be a further deterioration of the financial markets...but that is for another day.

What the government is trying to do is pin the loss of  "...approximately $1.4 billion" on the two Bear Stearns hedge fund managers. However, the indictment fails to draw the necessary lines to connect the dots.

Count one of the indictment alleges violations of the securities laws, specifically 15 USC Sections 78j(b) and 78ff. It also alleges violations of 18 USC Sec. 1341 for wire fraud.

First the easy one...for there to be a violation of wire fraud, Cioffi and Tannin must "...knowingly and intentionally devise  a scheme and artifice to defraud...." Therefore there must have been a scheme. [Wire fraud requires the existence of a "scheme" in order for there to be wire fraud.]

So now the government must prove that the two actors created a "scheme or device" designed to take money from investors. In other words, the government "...must prove (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation."

And what does the government offer as violations?

1. Cioffi said to a Bear Stearns broker on 3/3/2007 that the funds represented an awesome opportunity.

2. Tannin said on 3/21/2007 he was going to invest more.

3. Cioffi and Tannin on 4/25/2007 was on a conference call and did not tell everyone on the call that the market and the funds were not in good shape.

4. Tannin told a counter-party he expected no large redemptions on 5/3/2007

5. In May of 2007, Cioffi told a Bear broker he had $5.5 million invested in the funds.

 

This indictment is a sham. The government has failed to even get close to meeting its burden of alleging a crime.

It is obvious the government must go back to the drawing boards and try to produce an indictment that alleges that these two men caused the investors in the two funds to lose money. Without causation, this indictment must be dismissed.

More later....