Bear Stearns Defense Holds Lessons For Execs

By Nathaniel Burney | November 18, 2009 AAA

It didn't take long after the housing boom turned bust and trillions of dollars of wealth had gone poof that the public was out for blood. The government needed to "do something" about the mess.

An obvious point of focus were the securities firms Bear Stearns (now a part of JPMorgan Chase (NYSE:JPM)) and Lehman Brothers (OTC:LEHMQ) (now a

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part of Barclays (NYSE:BCS)) which blew up in quick succession. From there, it does not take a huge leap of logic to understand how federal prosecutors set their sights on Ralph Cioffi and Matt Tannin, two former managers of Bear hedge funds who were plucked out of obscurity, paraded through a perp walk and unceremoniously read their rights as criminal defendants. (For background reading, see Dissecting The Bear Stearns Hedge Fund Collapse.)

As their November 10 acquittals attest, they didn't actually commit any crimes. But that didn't spare them from two years of hell during which they were investigated, indicted, vilified, prosecuted and put on trial. If they'd lost, that would have all been a picnic compared with the 20 years of prison time they would have faced.

If the case teaches us anything, it's that such ordeals can befall executives - innocent and otherwise. If enough things go wrong on their watch, it's not all that rare for bosses to find gung-ho prosecutors eager to indict them before all the facts are in.

That leads to the question: What can you do to protect yourself if you fall under the eye of a suspicious prosecutor? Here, the Bear Stearns case is instructive.

Lesson One
You're on your own. If you ever find yourself on the receiving end of an indictment related to your professional activities, don't count on your employer to come to your rescue. Simply put, when criminal charges are filed these days, a corporation's interests and an executive's quickly diverge. To many corporations, an indictment of the organization alone is a death sentence - as it was for accounting giant Arthur Andersen. That means the employer that once took such good care of you will now be more than willing to cooperate with the government - even if that means throwing you under the bus.

The meaning of cooperation has evolved over time, too. Back in the wake of the Enron and WorldCom scandals, the Bush administration began taking a hard line against white-collar crime and federal prosecutors forced corporations to waive attorney-client privilege. No longer. These days, the feds are once again willing to allow corporations to cover the legal fees of employees under scrutiny. Where the government does take a hard line is in insisting that companies disclose pretty much everything that's relevant to a case - if they want to receive credit for cooperating.

On a practical level, that means companies often don't wait to receive subpoenas to begin turning over the email. They're also going to turn over all relevant financial data, memos and minutes. They're going to name names. The government is going to get it all. There's nothing you can do about it, except try to make sure the information isn't misinterpreted.

You can expect a fair amount of misinterpretation, too. No matter how much is turned over to them, prosecutors will only know a sliver of what actually happened, and they may be totally clueless about the context. As a result, it's easy to see how they might reach inaccurate conclusions.

Nor does it help that prosecutors are usually from another world. It's rare to find one who has earned a Series 7 securities license or an M.B.A. They're lawyers. They speak a foreign lingo yet are the ones who ultimately will decide whether to charge you with a crime.

Another reason prosecutors may get things wrong is the place from which they start. Few investigations materialize out of thin air. In most cases, somebody accuses you or your company of lying, cheating or stealing. That's the lens through which the government will most likely come to view its investigation of you.

Like anyone else, prosecutors make up their minds by combining limited knowledge with common sense. Unfortunately, what they usually know is fairly limited, and their common sense, as we have seen, is sometimes sorely lacking.

As such, you may soon find the need to change that prosecutor's mind and prove that you did not commit a crime here. Doing so means taking an aggressive approach to the task.

Lesson Two
Be aggressive from the start. In the Bear case, prosecutors seemed to misinterpret what the evidence meant. Their "greatest hits" emails, which they apparently viewed as a smoking gun, actually turned out to help the defense when put in context. The messages apparently convinced the jury that the hedge fund managers were working hard to look after investors' interests in volatile markets - not that the managers were putting on happy faces in public while certain of doom-and-gloom in private.

Full disclosure: In the Bear hedge fund case, I defended a company fund manager who was investigated but never indicted. I was immersed in this case from start to finish. I came away convinced it might never have been brought if those of us on the defense side had taken more control earlier and better educated the government about what was really going on.

To me the lesson is that defendants need to take control. That means hiring a good lawyer and working with him to make sure he masters the facts. Then you need to make sure your lawyer presents those facts to prosecutors in a way that gives them a new perspective on the evidence.

You need to act quickly too. The more time that goes by, and the more resources prosecutors put into your case, the more politically difficult it becomes for them to drop it. Instead, pressure mounts on them to press ahead. So the sooner you take control, the better.

With any investigation, the goal of the investigated should be to prevent being charged with anything in the first place. If that proves impossible, however, you need to fight back and fight back hard.

Lesson Three
Take the fight to prosecutors. That means going on the offensive and making the government fight to defend its own actions and missteps. Keep making it clear that the prosecutors have things wrong and that they have done things wrong.

If all else fails and you end up in front of a jury, do what Cioffi and Tannin's lawyers did so well: Attack the government's case. Demonstrate that the prosecution just doesn't get it. Make sure the jurors do get the concepts. Give them the tools to understand that you may have misjudged, but you certainly didn't defraud.

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