September 20, 2006
Can Blowing a Couple Billion Dollars in One Week Not Be a Crime?
The revelation by the large hedge fund Amaranth Advisors that a series of risky bets by a natural gas trader have resulted in losses estimated at anywhere from $2 billion to $5 billion -- the "b" is correct -- in only a few weeks raises a question whether there has been any criminal conduct. A decline in value of that magnitude in a short a period of time, less than a month based on the reported value of the fund at the end of August at $9.5 billion and its current value of about $5 billion, triggers the natural response to leap immediately to the conclusion that someone acted illegally. Think back to the collapse of Barings Bank in 1995 caused by trader Nick Leeson's rogue trading that caused over a billion dollars in losses (see here), and he subsequently ended up in jail. Amaranth has a similar young (32) star trader, Brian Hunter, who appears to have triggered the losses through a series of highly leveraged transactions in natural gas futures that did not pan out when the price continued to decline.
But large losses are not necessarily a sign of criminal conduct, although a Hartford Courant story (here) notes that Connecticut Attorney General Richard Blumenthal's office has opened an investigation of the Greenwich-based hedge fund. There may be disclosure issues for the hedge fund, but these investment vehicles are marketed as high-risk/high-reward, and investors must be "sophisticated" in order to put money into them. Investors may cry out about their losses as being "unexpected" or even "improper," but the criminal law is not designed to punish those who are hired to take risks that may (and do) turn out to cause losses. While investors might claim not to have understood the risk of investing in Amaranth, and no one invests money in order to lose it, when you play in the big time there are going to be large disappointments. (ph)
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Quick answer: no.
Leeson would have been golden if he had played by the rules and fessed up when his position broke. The trader here made $100m last year; his kids will die rich. The only losers here are dumb rich people (and Goldman with its confraternity). Like the Paris-Hilton tax cuts in reverse, this story just warms your heart.
Posted by: wcw | Sep 20, 2006 1:32:25 PM
While studying law at Georgia State, it was my privilege to learn criminal law from Prof. Podgor. She was, in my law school experience, the only prof who used "pure" socratic method. One of her classroom techniques was to assign each student a criminal law word or phrase - for the entire semester. Any time that word or phrase came up in class, the assigned student was to say the word. Mine was "mens rea,"* an essential element of all but strict-liability offenses like statutory rape.
My two cents: If blowing a couple of billion dollars in a week is enough, per se, to establish mens rea, there are 535 fat cats in Washington, D.C. who are ripe for conviction.
As a transactional attorney, I don't often get to use that term, but when I do I always thank Prof. Podgor. ;-)
* Non-lawyers can look it up at Wikipedia:
Posted by: Kurt Schulzke | Sep 21, 2006 8:00:20 AM
Every time I read this blog I cringe at the lack of knowledge of fundamental legal propositions shown by the writers.
In this town we are all innocent until investigated, given the breadth of the federal criminal law.
Losses on this magnitude can be a crime, if the result of recklessness. United States v. Ely, No. 96-30070 (9th Cir. 04/23/1998)
(indictment can charge bank fraud by charging directors with throwing money out the window or equivalent conduct)("a charge of "reckless disregard" of bank property adequately charges the bank's directors with a violation of S 1344.").
Posted by: Moe Levine | Sep 21, 2006 8:38:14 AM