By William D. Cohan
One of the most glaring travesties of the financial crisis has been the failure of the U.S. justice system to establish the truth and punish the responsible. In at least one case, it’s not too late to do the right thing.
U.S. District Judge Frederic Block should reject the preposterous proposed civil settlement between the Securities and Exchange Commission and Ralph Cioffi and Matthew Tannin, former Bear Stearns hedge-fund managers. The public deserves to see this case go to trial.
At a hearing on Feb. 13, Block, a longtime federal jurist in the Eastern District of New York, referred to the proposed settlement as “chump change.” He’s right. Investors lost at least $1.6 billion in two hedge funds the men managed at Bear Stearns Asset Management -- in part, the SEC alleges, thanks to the managers’ misleading statements. For this, Cioffi and Tannin would pay a total of only $1.05 million. Worse, the two men would, of course, neither admit nor deny guilt for their actions.
Incredibly, the SEC has argued in recent court filings and in the public statements of its chairman, Mary Schapiro, that the settlement is the best it can do. Its position simply doesn’t jibe with the claims in its original 2008 civil complaint: that the two men “misrepresented the extent to which the funds had invested in securities backed by subprime mortgages,” that Cioffi “did not tell investors about a redemption of a portion of his personal investment” in one of the funds, that Cioffi “misrepresented the level of investor redemption requests,” that Tannin “misrepresented” whether he was going to add to his personal investment in one of the funds, and that, during an investor call, Tannin “misrepresented the prospects” of the funds “going forward.”
Adequate and Reasonable
In a Feb. 21 letter to Block, the SEC said it was willing to stop pursuing these charges in favor of the “fair, adequate and reasonable” $1.05 million settlement because it represents the “scope of relief” the SEC would be “likely” to obtain if it were successful in court, “taking into account the litigation risks” and the “willingness of Cioffi and Tannin to consent to a judgment and not deny the allegations any further.” In other words, despite piles of powerful evidence on its side of the ledger, the SEC was afraid it would lose if it decided to try the case in Block’s court. So rather than attempt to make its case -- to show just how deceitful the two men had been about what was going on at the funds -- the SEC, which is charged with protecting investors, decided to fold its tent and go home.
At a public meeting on Feb. 22, Schapiro further defended the SEC’s decision to settle cases rather than try them in court: The settlements “serve the purpose of putting the rest of the industry on notice about conduct we believe violates the law and can lead to hundreds of millions of dollars in fines, which I don’t think any firm enjoys paying, or seeing their name highlighted as somebody who’s violated the law.”
I am utterly missing the deterrent value of the SEC’s proposed settlement with Cioffi and Tannin. Indeed, a recent investigation by the New York Times demonstrated that such settlements don’t deter Wall Street recidivism.
As for the practice of allowing defendants to settle without admitting or denying guilt, Schapiro claimed that without that provision “people won’t settle with us.”
To which I say, “Fantastic!”
Gory Details
Cases of wrongdoing at the highest levels of Wall Street should not be settled. The SEC -- and other enforcement bodies, such as the Justice Department -- should try them in court, let the facts come out in their full and gory details and then let the chips fall where they may. At least with a trial, the American public would finally have access to the piles of internal documents, witness testimony and other evidence that can help us make sense of how and why one major Wall Street firm after another collapsed, why no one has been held accountable and how we can prevent something similar from happening again.
The settlements, on the other hand, accomplish absolutely nothing other than reminding us once again that the SEC is not working in the public’s interest, despite all its protests to the contrary. They merely allow the SEC to come up with some happy talk about how many cases it is bringing against Wall Street and how great its track record is.
We need facts. We need substance. We need explanations for what happened. We need accountability. We don’t need any more mind-numbing pabulum about why a minuscule financial settlement -- where the defendants are absolved of any responsibility for their actions -- is somehow in our best interest.
Frankly, we need a new SEC.
