Acquitted!

Jurors found two ex-Bear Stearns managers not guilty on all counts related to their failed hedge funds. Paradoxically, investors should be encouraged.

In April of 2007 Ralph Cioffi and Matt Tannin exchanged some frank emails regarding the sub-prime mortgage market. Later on, when the market blew up, it took their fund down with it. 300 investors lost $1.6 billion.

Prosecutors said that the two hid warning signs that their hedge fund was headed over a cliff. This was the only major criminal prosecution stemming from the financial crisis. Jurors took less than two days to decide that the case was built on hindsight-bias—the inclination to see events that have occurred as more predictable than in fact they were.

Cioffi and Tannin were by many reports arrogant and reckless, and their investment strategy was deeply flawed. But the investors who trusted them with their cash were sophisticated institutions and individuals who were apparently aware of the pair’s approach to the markets.

While extracting a pound of flesh from an arrogant manager might be satisfying, investors should actually be relieved. If the government had succeeded in criminalizing investment failures, far, far fewer people would try out new strategies. Our markets and economy are built on trial and error. When honest mistakes become crimes, people will just stop trying. That won’t help anyone.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-05T13:51:00+00:00 November 10th, 2009|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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