Bear Stearns Hedge-Fund Managers: Fraudulent or Plain Incompetent?

After Yesterday’s case, former Bear Stearns hedge-fund managers Ralph Cioffi and Matthew Tannin were found not guilty of securities and wire fraud. Prosecutors claimed that the two deceived investors about the deteriorating health of the funds, while removing their own partner capital at the same time due to the funds’ dismal performance. The failure of this fund in 2007 foreshadowed the proceeding collapse of Bear Stearns less than a year later.

The case was based upon a series of e-mails that were exchanged between Cioffi and Tannin that seemed to contradict the positive attitude that they were projecting to their clients. A message from Tannin in April 2007 to Cioffi stated that he knew the subprime market was ready to crash and suggested closing the funds. However, the defense stated that the e-mails were taken out of context and much of the prosecution's case was built on the current bias against the financial industry following the subprime mortgage crisis.

As popular media continues to bash the financial services industry, and as anti-Wall Street rhetoric remains common on Capitol Hill, it is highly encouraging then to see an impartial jury weigh in on such a case, devoid of biased preconceived notions. However, what Cioffi and Tannin lacked in fraudulent intentions, they surely made up for in their sheer inability to effectively manage risk. Though not criminally liable, Cioffi and Tannin were irresponsible in their roles as financial fiduciaries, and as a result lost a total of $1.6 billion for their three hundred plus clients.