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The Bear Defence

I have constantly pushed for more criminal actions taken against income opportunity sellers, ie: franchisors, mlm distributors, and business opportunity distributors.

These white collar crimes seem to drop through the criminal system.

Given this bias, what do I think of the recent Bear Stearn's criminal indictments?

Actually, so far, not much.

Unlike franchisor, network marketers, and business opportunity sellers, the Bear Stearns Asset Management (BSAM) portfolio managers face a real problem: how to prevent a run on the bank.

I believe that they have a duty to mislead under the following conditions.

If the lie were to be believed, and it would be reasonable to expect that the bank run would be stopped and the underlying assets protected.

(Of course this is just one more of my deviant deviations from modern disclosure law and the duty to tell the whole truth.)

This duty ought to protect them against criminal prosecution, but should not protect them against civil liability.

The SEC reports that the civil liability case is:

"The SEC's complaint alleges that when the hedge funds took increasing hits to the value of their portfolios during the first five months of 2007 and faced escalating redemptions and margin calls, then-BSAM senior managing directors Ralph R. Cioffi and Matthew M. Tannin deceived their own investors and certain institutional counterparties about the funds' growing troubles until they collapsed and caused investor losses of approximately $1.8 billion."

What troubles me about the criminal case is this. If Cioffi and Tannin had shut the fund down, I suspect that the investor losses are about the same -the run on the bank destroys any value.

How can it be a criminal fraud to foolishly step in front of the bank ran to try to prevent it, you fail?

Would we have put Jimmy Stewart in jail if George Bailey's Saving and Loan was short by $3.00?
Don't expect that their counsel will push forward with this aggressive defence. Nor am I endorsing Larry Ribstein's view that this is just another poorly thought out criminalization of an agency cost.

The WSJ is running a poll on the strength of the criminal case against the Bear Stearn's managers.

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Full post as published by Misleading Advertising Law on June 19, 2008 (boomark / email).