On Tuesday, the two Bear Stearns hedge fund managers on trial for deceiving investors during the financial crisis were acquitted on all counts.
Even though it was the only major criminal trial stemming from the economic melt-down, the jury decided Matthew Tannin and Ralph Cioffi didn’t intentionally deceive investors about the health of their collapsing funds; nor should they be scapegoats for the financial crisis.
Sources close to the prosecution told us the government made a compelling case, but the Brooklyn jury wasn’t sophisticated enough to understand.
A fair charge? And what does the acquittal mean for the rest of Wall Street? We asked white collar defence expert David Douglass, a partner at Shook, Hardy & Bacon and chair of the Government Enforcement and Corporate Compliance committee of DRI, the voice of the defence bar and. Here are excerpts:
TBI: Is it fair to blame a “dumb” jury?
I don’t know a losing trial lawyer who thinks the jury got it.
I think the jury did get it. I think the jury got that this is very complex stuff that part of investment is selling, and I think they understood that no one has a crystal ball. I remember when those emails came out and they were on the front page of the papers, and everyone said, “Isn’t this outrageous.” The flip side is what would these people say to all the people who had already put their money in? I think the jury understood that these people were doing their best to get through some very challenging circumstances, and they didn’t do it perfectly. That doesn’t make it a crime.
How does the Bear trial affect future prosecutions related to the financial crisis, like Dick Fuld? Does it mean that prosecutors will focus on easier to prove civil charges?
No. I think if we look back to the way prosecutions have followed the financial crisis of 2001, we learned a couple of lessons. The government has learned that cases built on complex financial transactions fail, but cases that can be reduced to very simple familiar kinds of culpable conduct — lying, cheating, stealing — those cases succeed. So when the government had complex facts and lots of testimony about what documents mean, they were unsuccessful, but when they could say to the jury, “This person lied,” they tend to win.
The problem with this case is that the prosecution tried to take what was essentially a complex financial case and make it seem like a straightforward case of lying.
So I think the lesson is to the extent that the conduct falls into very familiar kinds of wrongdoing, juries will convict. But juries are sophisticated and understand these kind of financial transactions are complex, uncertain, and there are no guarantees, and the mere fact that a transaction did not work out as hoped cannot possibly be criminal.
I think prosecutors will continue to be aggressive, but I think they will also learn lessons and probably be a little more careful in the future.
What’s with the surge in insider trading prosecutions against hedge funds like Raj Rajaratnam and Galleon?
I don’t know if I’d quite characterise it as a surge as much as I’d see it as one big case with lots of defendants. But I’ll tell you what did surprise me is the wiretaps. It does suggest a very aggressive approach to these kind of cases, which struck me as new.
Are wiretaps the main way investigators are getting more aggressive on financial cases?
It’s too early to tell.
We don’t know what caused them to use wiretaps. Remember, a wiretap is a very resource intensive effort. And particularly where you’re looking at these kind of broad complex schemes, You have to people on hand to listen to and screen potentially lots of conversations. Now in this case it was probably made easier because they had certain cell phones that were dedicated to this use.
So I think we will wait and see. Particularly if they are successful in achieving convictions, I think we will see other prosecutors look more closely at wiretaps as a investigative technique for financial crimes. The thing about wiretaps is, first of all, someone has to listen and they have to say “Oh this is not an inappropriate call you have to screen.” Second, you don’t want to wiretap someone who might be in on to the fact that they’re under a federal investigation, because then you get exculpatory information. So really it can only be used in the right set of circumstances in a case that really warrants devoting significant resources. It’s not an easy thing to do.
My clients frequently say, “Oh do I have to worry about being wiretapped?” I really don’t think so, because I don’t think a prosecutor would do it that way. They’re going to look at your emails. But you know, I’m rethinking that a little bit.
Are you seeing any other trends in white collar prosecutions?
What we’ve really seen is that the prosecutors are much quicker out of the box investigating fraud with respect to stimulus money than we’ve seen in the past.
They are really working very closely with the agencies that dispense the money, their training agents, and they know that with this kind of massive expenditure of money there will be some kind of fraud and they’re working hard to catch it earlier so it’s much faster and will be much more aggressive. But it’s too early to tell what the results of that will be or what kind of cases they’ll bring.
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