John Bougearel
Well that is a surprise. On April 22 2007 Tannin e-mailed Cioffi that the “subprime market looks pretty damn ugly and could be toast” and further suggested that they “should close down the funds immediately” if projections for the CDO Market were anywhere near accurate. Three days later on April 25 Tannin told investors on a conference call “We’re very comfortable with exactly where we are.”
And prosecutors managed to fail to make their case for misleading investors, fraud and securities violations.
The defense witnesses called Glenn Hubbard from Columbia University of Business. In Tannin and Cioffi’s defense, he told jurors that the funds failed because lenders stopped extending credit. And in a bit of counterfactual testimony, Hubbard added that Cioffi’s and Tannin’s investing strategies “could have returned the funds to profitability…had they continued to operate.”
Wait a minute, let’s back up the truck here. In April Tannin advises Cioffi they ought to shut down the funds because the CDO market was telling him that their investing strategies were toast. Yet, they chose to roll the dice and mislead investors 3 days later about their concerns for their subprime hedge fund strategies viability. The funds continued to operate until mid-June, at which time the hedge fund strategy totally blew up. In July 2007, Tannin and Cioffi told their investors there was little if any money that would be returned to them precisely because their strategy was totally inappropriate for the climate.
To wit, their fund did continue to operate long enough to blow up. Had lenders continued to throw money into their black hole, the losses sustained by the hedge fund would only have worsened. Hubbard, the defense’s expert witness, to be frank, lied in his testimony.
The defense also claimed their e-mails “were more ambiguous than the gov’t alleged.” Of course, less ambiguous was Cioffi’s decision to move $2 million of his personal holdings out of their hedge fund in March 2007.
Defense laywers argued prosecutors “failed” to prove beyond a reasonable doubt that the two “lied or conspired to defraud investors.”
“If AAA bonds are systematically downgraded then there is simply no way for us to make money — ever,” Tannin wrote in the message, sent on a Sunday April 22 2007 morning. “Caution would lead us to conclude the model is right — and we’re in bad shape.”Tannin’s lawyer, Susan Brune, told jurors that Tannin “misunderstood the mathematical model.” That is a laugh Susan, while most models were pro-cyclically biased and flawed, this one was spot on, and Tannin misunderstood it? Maybe the jurors bought your schtick Ms. Brune, but who else do you think you can deceive?
Funny too, that the reason no one could see the crisis coming was because it was understood that the pro-cyclical models informed everyone that such a crisis could not happen. Now, when a model points to a developing risk, defense lawyers claim the model was misunderstood. So I ask Ms. Brune, what did the model really and truly indicate and was the model actually right or wrong? Tannin believed the model was right, what did you believe Ms. Brune? Just curious.
In my estimation, I would say that Tannin did a very reasonable job of proving beyond a reasonable doubt he knew his hedge funds were toast. In the event of a ratings downgrade, there would be “simply no way for us to make money — ever.”
So, what did they do to protect their clients money? What did they do to hedge the fund against the risk of a ratings downgrade? Well, they did nothing but reassure investors that everything was hunky-dory in subprime la-la land! Their failure to hedge the risks in their subprime portfolios was reprehensible, especially given the foreknowledge of the problems that lie ahead for subprime securities. If the captain of the titanic knew there was an iceberg ahead, wouldn’t he be expected to alter course? Put another way, the captains of this subprime hedge fund said, “Damn the torpedoes, full steam ahead.” How often do we heard that refrain on Wall Street passing for a risk management strategy?