Bear Stearns Bankers Walk Free

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Every time there's a financial crash, the trials inevitably follow.  Some of them are entirely deserved--I commend to you Once in Golconda, which details the fabulous rise and fall of Richard Whitney.  Others have a distinct flavor of hindsight bias about them--we just can't believe that so much money could disappear without outright criminality.  Especially in these days of endless emails permanently preserved, chances are you can find a few incriminating phrases to build a prosecution.  But even valid cases are hard to prove.  When Eliot Spitzer went to trial, he lost; his fabulous wins were settlements, and it's not clear that the biggest settlements came from the guiltiest parties.  Meanwhile, quite a few unethical practices went unpunished.

The first of the big trials this go around just ended in a bust:

The two men, Ralph Cioffi and Matthew Tannin, were accused of lying to investors -- telling them they were optimistic about their funds, while privately worrying they were all but dead. The funds collapsed in 2007, in a prelude to the mortgage crisis that eventually felled Bear Stearns itself less than a year later and heralded the arrival of a full-blown credit crisis. (Bear Stearns was bought by J.P. Morgan Chase & Co.)

The acquittals are a setback for the U.S. attorney's office in Brooklyn, N.Y., which along with several other offices is investigating Wall Street for possible criminal wrongdoing stemming from the credit crisis, including at Lehman Brothers Holdings Inc. and American International Group Inc. In Tuesday's case, the question boiled down to this: Were the two men misleading investors, or simply putting a positive spin on sagging returns?

Jurors in Brooklyn found there was no evidence beyond a reasonable doubt that the defendants had criminal intent and conspired to mislead their investors. There "was nothing that was clear and convincing," said juror Tabasam Bhatti, a 31-year-old civil servant. The prosecution didn't provide "enough information," he said.

Messrs. Cioffi and Tannin were the first and so far only Wall Street executives to face criminal securities-fraud charges stemming from the crisis, underscoring the difficulty of assigning criminal liability for Wall Street's mistakes.

From what I understand, this seems like the right result.  The evidence against them seems to have been pretty thin--a few passages from emails that didn't sound nearly so bad when the entire email was read, and the simple fact of the fund's decline.

The government put on display what appeared to be incriminating emails by Mr. Tannin in which he expressed his fear about the markets in 2007. In an email he wrote to Mr. Cioffi in April, Mr. Tannin said there was "simply no way for us to make money -- ever," and that they should consider closing the funds. Then, several days later, he told investors in a conference call that he was "comfortable" with the funds' performance.

Defense lawyers said the prosecutors were taking the emails out of context. What the April email showed, when read in its entirety, is that Mr. Tannin also said the men could choose to make aggressive bets rather than close the funds, the lawyers argued.

The public wants big criminals to take the fall.  But the bankers, while stupid--in many cases irresponsibly so--didn't necessarily break any laws.  The clear-cut fraud was at the mortgage broker level, but those are regulated by the individual states, and also, pulling some guy out of his office in a strip mall and putting him on the dock isn't nearly as impressive as sticking the princes of Wall Street at the defense table.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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