The refusal of the jury in the trial of former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin to accept the government’s interpretation of their worries about the funds is good news for just about everyone.
Cioffi and Tannin were accused of lying to their investors about the health of two mortgage-related funds that collapsed in 2007. The case relied upon cherry picked statements by the two men that the government claimed demonstrated they knew the funds were in trouble even when they were telling investors that they were “comfortable” with the performance of the funds.
But when taken in context, the evidence provided actually indicated that the men were engaged in an active and ongoing analysis of the shape of the market. They were evaluating different pieces of evidence from the market, some of which seemed to show that the market for mortgages was falling apart and some of which indicated that the markets were temporarily dislocated due to an investor panic over the popping of the real estate bubble.
We want fund managers to feel free to express doubt about their strategies, to openly debate new evidence. This case threatened to have a chilling effect on internal debates over fund strategies. Hopefully this acquittal will restore the confidence in fund managers that juries will not jump to the conclusion that the private expression of doubt equals fraud if it is not disclosed to investors.
Unfortunately, our view on this may be too optimistic. The very threat of prosecution may be a deterrent enough for many, even if they think they would be acquitted in the end. The chilling effect of this misguided prosecution may not have been totally extinguished by today’s acquittal.