Bear Stearns Acquittals Send Message to DOJ, SEC

by Kurt Schulzke on November 12, 2009

Not Guilty! Congratulations to Ralph Cioffi and Matthew Tannin on their acquittal, Tuesday, on securities fraud charges.  Responding, in June 2008, to pontification by the SEC on the arrests of Cioffi and Tannin (see video flashback, below)…

…I pretty much nailed the eventual outcome of these specious, politically motivated indictments in legal and market terms:

Apart from the eventual finding of guilt or innocence, the more I consider the FBI’s and SEC’s conduct in the arrests, the more I see it as a political show calculated not to enforce the law, but rather to satisfy the blood lust of investors and borrowers who should themselves be spanked for thinking they should be entitled to high returns (or sub-prime mortgages) without running high risks.

Ultimately, the prosecution of this case — which seems based almost entirely on e-mail traffic — will harm the markets more than help them by discouraging (a) expressions of optimism when times are tough and (b) candid give and take within firms. These, together, are essential to the functioning of financial markets. What would we think of a bank president who runs around Wall Street yelling at the top of his lungs that his bank’s cash balance is only a fraction of what it owes depositors?

We can thank this kind of prosecutorial overkill for banks’ current reluctance to make meaningful loans and for the reluctance of market players of various stripes to do what market players are supposed to do: take risks and speak optimistically about the future.

Congratulations, as well, to the Manhattan jury that so ably sniffed out this sham prosecution. Just imagine the outcome had Jeff Skilling been granted a change of venue to Manhattan. We can only hope that the U.S. Supreme Court will follow suit and unravel the absurdity of so-called “honest services fraud” by exonerating Mr. Skilling.