By Brett Sherman; Wall Street Law Bog, The Sherman Law Firm
CHANCE TO SAVE FACE?
Federal Prosecutors Have Been Criticized For Rushing Their 2008 Indictment in a complex criminal fraud case against former Bear Stearns Hedge Fund Managers Ralph Cioffi and Matthew Tannin.
That Case Ended In Acquittal.
Lawyers for the SEC Have Taken Their Time. But Will The Civil Trial End With A Better Reult For The Government? Maybe so.
Double Jeopardy is Not An Issue
First, the SEC lawsuit is NOT DOUBLE JEOPARDY.
Double jeopardy is all about the possibility of incareration. Jail. Unlike the failed 2009 criminal prosecution of Cioffi and Tannin, the SEC lawsuit cannot result in jail time for the managers of two Bear Stearns subprime hedge funds that went bankrupt in July 2007. Thus, no double jeopardy.
The only high profile criminal case about the subprime meltdown and financial crisis ended disastrously for the federal government.
Ralph Cioffi and Matthew Tannin, the now infamous managers of two Bear Stearns hedge funds that failed during the summer of 2007, were arrested and charged in with fraud-based crimes June 2008. The crux of the charges was that the two Bear executives deceived investors about the risks and performance of complex designer securities called collateralized debt obligations (and better known as CDOs). The CDOs at issue were backed by subprime mortgages.
Subprime mortgage defaults spiked when the housing bubble popped in 2006. By 2007, mortgage defaults were so high that investors stopped buying subprime-backed CDOs. As demand shrunk, the value of these securities plunged.
In 2009, a jury found Cioffi and Tannin not guilty of criminal fraud charges on all counts.
A CHILLING EFFECT?
Pundits have pointed to the acquittal, an embarrassment for prosectors, to help explain the complete absence of subsequent indictments against executives from Bear Stearns or other big players in the market for mortgage bonds.
"There is no doubt in my mind that the verdict in the Bear Stearns hedge fund trial has had a huge chilling effect on prosecutions," said retired judge and trial lawyer Lee Sherman.
It isn't exactly good for the careers of prosecutors to lose these kinds of high visibility cases."
Lee Sherman is a senior consultant to The Sherman Law Firm and a regular Wall Street Law Blog contributor.
WHY PUT CIOFFI AND TANNIN ON TRIAL AGAIN?
For many observers, the SEC's decision to press on with its case against Cioffi and Tannin is a surprise. The allegations are nearly identical to the failed Bear Stearns prosecution.
However, Mr. Sherman believes the move makes sense.
"Remember," Sherman said, "Unlike federal prosecutors, who were bound by the Constitution's speedy trial requirement, the SEC has had years to investigate and prepare for this. Plus -- and I believe this is a major factor -- the SEC has a far easier burden of proof."
PREPONDERRANCE OF THE EVIDENCE
In 2009, federal prosecutors failed -- in the jury's view -- to prove the two former Bear Stearns executives guilty beyond a reasonable doubt. In the civil trial, SEC lawyers will try to prove civil liability rather than guilt and, therefore, the burden of proof is the preponderance of the evidence standard.
Under the preponderrence standard, jurors are typically instructed to find liability if they feel 51% sure that the evidence supports liability. Obviously, with the preponderrence standard, the bar is set much lower than it is under the beyond a reasonable doubt required in criminal cases.
Perhaps the biggest reason why the SEC chose to proceed against Cioffi and Tannin is to rehabilitate the Commission's severely damaged reputation. Under the Bush administration, the SEC failed to detect and prevent fraud by Wall Street investment banks again and again and again. The Commission has been rightly blamed for being asleep at the switch.
Under President Obama, personnel and cosmetic changes at the SEC have been made. And there has been the predictable amount of tough talk. Still, in terms of real change, the SEC still needs a major accomplishment before the public will believe there's a new sheriff in town.
Stay tuned... This may get interesting.
Wall Street Law Blog; A Publication of The Sherman Law Firm*Information about SEC's decision to move forward via Fortune tinyurl.com/3b6a7cs