A federal judge in Brooklyn has “reluctantly” approved Securities and Exchange Commission settlements with Ralph Cioffi and Matthew Tannin, the two former Bear Stearns hedge fund managers accused with fanfare of helping to usher in the great recession.
In a lively 19-page opinion handed down on June 18, Eastern District Judge Frederic Block (See Profile) agreed to sign consent judgments to resolve civil claims that the SEC brought in June 2008 against Cioffi and Tannin, who managed two Bear Stearns hedge funds that lost a combined $1.6 billion in 2007, triggering the famed investment bank’s collapse. The settlement, under which Cioffi and Tannin admit no wrongdoing, calls for them to pay $800,000 and $250,000, respectively, in disgorgement and penalties. Block previously called the disgorgements “chump change” when the deals were proposed in February.
“The court is constrained to accept the settlement,” Block wrote in Securities and Exchange Commission v. Cioffi, 08-cv-2457. “In doing so it notes the limited powers that Congress has afforded the SEC to recoup investor losses—as well as obstacles that it has placed in the path of litigation by the private bar—and invites Congress to consider whether more should be done by the government to come to the aid of the victims of Wall Street predators.”
The Justice Department indicted Cioffi and Tannin in June 2008, on the same day the SEC launched its civil suit, on charges of wire fraud and securities fraud. Prosecutors alleged that the duo misrepresented the state of two Bear Stearns hedge funds that were heavily invested in toxic mortgage-backed securities and subsequently lost their entire value.
The defendants won total acquittal at trial in November 2009, handing their lawyers at Brune & Richard and Williams & Connolly a huge victory in what remains the most high-profile criminal prosecution tied to the subprime meltdown.
The SEC pressed on with its parallel civil claims, but on the eve of a scheduled trial in February, Tannin’s lawyers at Brune & Richard and Cioffi’s lawyers at Hughes Hubbard & Reed told Block that they had reached deals with the agency.
Block wrote that he would sign off on the settlements, but not before lamenting what he sees as the relative impotence of the SEC and the private plaintiffs bar in the face of Wall Street wrongdoing. The primary purpose of SEC disgorgement orders and monetary penalties, he noted, is to deter violations of securities laws. Compensation of victims, he added, is largely left to private lawsuits and FINRA arbitrations, which have had limited success in recouping money for investors—particularly given the scope of the Private Securities Litigation Reform Act.
“Given this sorry state of affairs, Congress may wish to consider broadening the SEC’s power to recover amounts more reflective of investor losses,” Block wrote. He urged Congress, for example, to empower the SEC to assess heightened damages for willful and intentional violations. Congress has already granted the Commodities Futures Trading Commission similar powers, and the parallels between commodities trading and securities trading are “obvious,” he wrote. “For now, however, the court must accept the SEC’s enforcement authority as it currently stands. Regrettably, that authority leaves investors out in the cold.”
“I think the settlement is a reasonable one,” said Edward Little of Hughes Hubbard, who represented Cioffi. “I can’t comment much beyond that. We’re just glad it’s over.”
“I don’t think the judge’s comments about the power of the SEC have much to do with our client in particular,” Little added. “I think he was speaking very generally.”
Susan Brune of Brune & Richard, who represented Tannin, was not immediately available for comment.
Block’s ruling also features a discussion of Southern District Judge Jed Rakoff’s decision to reject the SEC’s proposed $285 million settlement with Citigroup last year. Block concluded that he didn’t need to wait for the U.S. Court of Appeals for the Second Circuit to rule on whether Rakoff (See Profile) overstepped his authority by scuttling the deal.
The judge noted that the Second Circuit recently had granted a stay of Rakoff’s ruling, questioning Rakoff’s approach (NYLJ, March 16). See SEC v. Citigroup Global Mkts., 673 F.3d 158 (2d Cir. 2012). “Although the circuit court was careful to note that it was passing only on the likelihood of success on appeal, see id. at 161, its reasoning was not equivocal in many respects,” Block wrote.
The SEC’s suit alleged that Cioffi and Tannin’s amassed a combined $2.75 million in ill-gotten gains through their management of the Bear Stearns funds. Measured against those gains, rather than against the massive investor losses, Block concluded that the consent judgments represent “a sizeable percentage of the outer limits the SEC could have reasonably expected to recover from a verdict in its favor.”
@|Jan Wolfe, a reporter for The Litigation Daily, an affiliate of the Law Journal, can be contacted at email@example.com.