Bloomberg Article Lambasts the SEC


Former investment banker and financial writer William Cohan has written a blistering critique of the SEC’s settlement with former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin, essentially accusing the SEC of abject surrender to the forces of evil and begging the judge to reject the settlement: “We are all worse off for the SEC’s continued lax enforcement of wrongdoing on Wall Street. If it won’t protect us from charlatans, who will? Judge Block, please deny the proposed pathetic settlement and send the parties back to the negotiating table or, even better, your court room.” (“SEC Surrender Continues With Bear Bankers Deal: William D. Cohan,” Bloomberg).

Cioffi and Tannin managed the infamous “Bear Stearns High-Grade Structured Credit Fund” and the “Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund.” The collapse of these funds cost investors $1.6 billion and led to the collapse of Bear Stearns itself, and was the beginning of the financial crisis “that nearly wiped Wall Street off the face of the earth.”

The funds were marketed as diversified funds with only 6 percent of the portfolios invested subprime mortgage-backed securities when, in fact, it was more like 60 percent. The SEC accused Cioffi and Tannin of fraudulently misleading investors and other market participants.

The case was set for trial on February 13, but the SEC settled with the defendants “at the last minute.” Consistent with its practice, the SEC allowed the defendants “consent” to its findings of fact without admitting to them, which allows them to deny them subsequent lawsuits and arbitrations brought by harmed investors. Cioffi, who received compensation of $22 million in 2005 and 2006, agreed to pay $800,000 and accept a three-year ban from the securities industry. Tannin, who made $4.4 million in his last two years at Bear Stearns, agreed to pay $250,000 and accepted a two-year ban. The settlement agreement contains a boilerplate injunctive provision sternly admonishing them not to violate the securities laws again.

The presiding judge reportedly called the settlements “chump change,” said the SEC’s injunctive provision was “silly,” and asked, “Am I just a rubber stamp here or is there some inquiry I ought to be making about these provisions?”

The law requires that, in order to approve a proposed settlement, the presiding judge must determine that it is “fair, adequate, reasonable and in the public interest.” In determining whether a settlement is adequate, Judge Jed S. Rakoff, who rejected a settlement between Citigroup and the SEC in a case that involved allegedly “built-to-fail mortgage securities that Citigroup sold and bet against, wrote, “the settlement must be adequate to ensure that the public interest is protected.” In determining whether the settlement is fair, it must be fair “to the parties and the public.”

It will be interesting to see how Judge Block decides these important questions. Cohan
argues that cost-of-doing-business settlements have no deterrent value and merely invite Wall Street to continue its reckless and unlawful conduct.

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.