In what seems to be a perplexing manner of how the Securities and Exchange Commission decides to either pursue a civil case or agrees to a settlement, the agency announced last week that it will not pursue the case against two former Bear Stearns hedge fund managers who were faulted for losing $1.6 billion of investors’ money.
The duo involved in the civil lawsuit, Ralph Cioffi and Matthew Tannin of the now defunct Bear Stearns Cos., were earlier said to have been responsible of loading up their funds with billions of dollars in lousy mortgage-backed securities and collateralized debt obligations, leveraged them to the max, and when the market for those securities went south in July of 2007, liquidated the funds.
Instead of going to court on February 13 as scheduled, the SEC at the last minute decided to settle the suit – Cioffi was fined $800,000 and agree to a three-year ban from the industry while Tannin will pay $250,000 in settlement and agree to a two-year ban, according to a Bloomberg report. The fines were paltry in comparison to the $22 million Cioffi made in 2005-2006 and the $4.4 million Tannin made in his last two years at Bear Stearns. Neither has to admit to wrongdoing.
The two were also acquitted from any criminal charges in federal court back in November 2009.
In the SEC filings against the two, it had stated that both misled their investors, particularly during the first five months of 2005 when they reported that investors’ exposure to subprime mortgages was at six percent when in fact the internal memo circulated within Bear Stearns showed that the exposure rate was closer to 60 percent.
Frederick Block, the judge who was to preside at the trial but instead has been asked to sign the settlement, questioned whether the terms fit the crime.
Block not only called the settlement chump change but also said the SEC’s injunctive provision was silly and asked, “Am I just a rubber stamp here or is there some inquiry I ought to be making about these provisions?”
Block’s statement echoed the famous view of the outspoken federal Judge Jed Rakoff, who last year rejected an agreement between the SEC and Citigroup, where the SEC fought to settle the case for $265 million and allow the firm to neither admit to nor deny any wrongdoings.
John Worland, the SEC’s attorney, defended the agency by saying that it has no ability to sue for damages, only for the disgorgement of ill-gotten gains.
The stunner came when Worland delivered a statement that said, “Neither Mr. Cioffi or Mr. Tannin got rich.”
Really? It seems that the SEC will have to come up with a proposed guideline pretty soon to define the term “rich” before pursuing or settling future securities fraud cases. In any event, if someone benefitted from a wrongful deal and earned millions of dollars in the process, I tend to think they have gotten pretty darn “rich”.
Reese Darragh is a contributing writer for CompliancEX and Wall Street Job Report. She is an experienced business news writer with expertise in macroeconomics topic, the financial industry, rules and regulations including the Dodd-Frank Act and the Sarbanes-Oxley Act as well as rules from other federal regulators. She has a Master Degree in International Economics and Finance from Brandeis University.