Part 1: Introduction -
Understanding securities fraud at Bear Stearns - Backstory of The Global Financial Crisis
Two and a half years later, why should anyone care whether Bear Stearns (through Senior Management) committed securities fraud?
Because...
(a) To understand how securities fraud by top executives at Bear Stearns toppled what was the fifth largest Wall Street investment bank is to understand why all of Wall Street's major investment banks subsequently disappeared.
(b) The fraud that caused the end of the era of the traditional Wall Street investment bank gave birth to a chain of events that evolved into the worst financial crisis since the Great Depression.
-and-
(c) As a direct result of their own securities fraud and other illegal conduct, members of senior management at Bear Stearns collected enormous financial windfalls that they did not earn and do not deserve to keep. Senior management's windfalls came at the expense of America's economy and the economies of other countries around the world (and, on a "closer to home" level, executive committee members enriched themselves at the expense of Bear's own employees and shareholders).
There are two basic elements of the financial windfalls that, to date, Bear's executive committee members have managed to retain-
First, Bear Stearns paid its Executive Committee members enormous cash bonuses for "leading" the company to record revenues from 2002 through 2006 with the same unsustainable high-risk business model that (a) caused Bear's failure and (combined with the same, similar, and/or related misconduct at Merrill Lynch and Lehman Brothers and Citi,and Goldman Sachs and insurance giant AIG -- to name a few of the responsible companies) (b) ultimately produced the global financial crisis.
The second (and far more lucrative) element of the financial windfalls reaped by senior management came from selling massive amounts of Bear Stearns stock at artificially high prices. The record "success" Bear Stearns achieved because of its fraudulent and unsustainable business model temporarily produced record high share prices for Bear Stearns common stock. Indeed, from January 2000 to January 2007, the share price for BSC stock quadrupled.
During this period of stock price inflation, Bear's five top executives -- all of them members of the former investment bank's executive committee -- reportedly sold more than $1 billion dollars worth of stock-based compensation from prior years.
Again, the story of unjust enrichment at Bear Stearns is a microcosm of unjust compensation practices all over Wall Street.
So far, securities fraud by Bear's former leaders has been a tremendous success. The primary reason for this is, we believe, the sheer complexity of the fraud. From the housing bubble to "affordability mortgages" to the different kinds of derivative securities that were part and parcel of the long running course of securities fraud at Bear Stearns (and on Wall Street generally), the misconduct at issue revolves around a lot of intimidating stuff.
From easier (but not easy) to understand concepts like subprime and Alt-a mortgages to harder (often headache inducing) "structured products" like mezzanine collateralized debt obligations, credit default swaps to fixed income terms like yield spreads, it is a daunting task to peel back the layers of fraud on Wall Street during the 2000s.
"Fraud by complexity" is very dangerous. Until Main Street has a far better understanding of what happened on Wall Street, then the corrupt rigged game that senior management for the old investment banks played so well for so long will resurface in slightly different form sooner rather than later.
A deep examination of securities fraud at Bear Stearns is, we at Wall Street Law Blog believe, a great place to start parsing fact from fiction and isolating the complex -- but ultimately fascinating -- story of the genesis of a financial catastrophe.
We do not profess to have all the answers. But , in subsequent parts of this series, we intend to ask questions and frame issues in ways designed to eliminate as much complexity as possible.
Stay tuned for Part 2 (and the rest of our series).
The Wall Street Law Blog, a Publication of The Sherman Law Firm.
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