Friday, June 20, 2008

Former Bear Stearns Managers Indicted

The founder and former senior portfolio manager of two Bear Stearns hedge funds, and a former portfolio manager of the funds were indicted for conspiracy, securities fraud, and wire fraud. One of the individuals was also charged with insider trading. The case is the classic case of the funds going down and everyone then looking for someone to blame.

The DOJ Press Release states that

"[T]he defendants believed that the Funds were in grave condition and at risk of collapse. However, rather than alerting the Funds’ investors and creditors to the bleak prospects of the Funds and facilitating an orderly wind-down, the defendants made misrepresentations to stave off withdrawal of investor funds and increased margin calls from creditors in the ultimately futile hope that the Funds’ prospects would improve and that the defendants’ incomes and reputations would remain intact. The subsequent collapse of the Funds during the summer of 2007 resulted in losses to investors totaling more than $1 billion."

This is likely to be yet another case in which emails will be used to try and show knowledge of problems with the funds and lack of honesty in reporting these problems to investors.   Clearly honesty in the market is important.  But one also has to wonder if the use of criminal charges is appropriate in cases that would not have occurred but for the poor economy. It is also a concern that the government is using overly broad statutes to criminalize an alleged lack of honesty.

See also:

Kate Kelly, Wall Street Jrl, Two Ex-Managers At Bear Indicted Over Hedge Funds

Landon Thomas Jr., New York Times,  Prosecutors Build Bear Stearns Case on E-Mails

Felix Salmon, Market Movers, Conde Nast Portfolio,com, Hedge Funds: The Legal Risks


Addendum - Indictment - Download indictment.pdf

(w/ a hat tip to Whitney Curtis)

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“I’m fearful of these markets,” . WOW. A manager of a highly leveraged fund was concerned about the prospect of his asset class and didnt call each investor screaming danger??!!? This case is such a reach. So what will happen when the Bear guys decide they cant fight the gov't and plead guilty? Calculate the guideline. Life in prison for not dodging the sub prime bullet.

Posted by: DAG | Jun 20, 2008 7:59:11 PM

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