Bear Stearns Case Will Test Wall Street's Fraud Boundaries, says David Siegal

October 12, 2009

A Case Pitting Spin Against Fraud
Wall Street Journal

A criminal trial involving two former Bear Stearns executives could help answer a key question stemming from the financial crisis: How far can Wall Street firms go to put a positive spin on bad news?

The two executives, Ralph Cioffi and Matthew Tannin, will fight securities-fraud charges in a widely anticipated trial beginning on Tuesday in a Brooklyn, N.Y., federal court. The money managers unsuccessfully scrambled to keep two mortgage-heavy Bear Stearns hedge funds afloat in 2007 amid sinking mortgage-market prices, the first of several blows that eventually felled Bear Stearns and marked the start of the credit crisis. 

Prosecutors accused Messrs. Cioffi and Tannin of misleading investors about the health of the two funds, testing the degree to which Wall Street should disclose bad news to investors.

"This case will be viewed by many as a test of where the boundary lies between acceptable, positive spin and outright fraud," says David Siegal, a former federal prosecutor who now is a defense lawyer at Haynes and Boone LLP. "Much of the government's case appears poised to rely on what many previously believed was just spin."

Two years since the crisis began and after dozens of government investigations of the financial industry, the Bear Stearns defendants are the only executives of a major Wall Street firm to face the threat of prison. The short list underscores the difficulty of assigning blame for Wall Street's mistakes.

Wall Street firms long have put poor results in a positive light. Such activity ordinarily is considered acceptable, particularly when dealing with sophisticated investors such as those in hedge funds. But critics say a defining feature of the credit crisis was how some Wall Street firms failed to timely acknowledge the sinking value of mortgage-related securities and other hard-to-trade investments.

The question in this case: whether Messrs. Cioffi and Tannin actively misled investors with the intent to defraud them.

This article excerpted from the Wall Street Journal. For full text, click here. (Subscription required.)

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