The Wall Street Law Journal

The Ultimate Argument Against Bear Stearns: Bear was the Cause, Shareholder losses the Effect

What follows is a pretty accurate recreation of a conversation from this morning with my friend Hillary. Hillary: "Isn't it going to be tough proving Bear Stearns caused your clients' losses?" Me: "Well, nothing is easy in litigation. I'm sure JP Morgan will have excellent lawyers with creative defenses. BUT I really think that this thing comes down to cause and effect.I'll put it this way - Bear Stearns ultimately collapsed in March, right?" Hillary: "Yeah, ok..." Me: "And what happened to the stock price?" Hillary: "Bear's stock price?" Me:"Yeah - what happened to the price of a share of Bear stock?" Hillary: "The stock got killed." Me: "Right. So the stock got killed because Bear collapsed. Put another way, Bear's collapse as a company caused Bear's stock to lose almost all value. And what caused my clients' losses?" Hillary: "They lost money in Bear stock, right? So Bear's share price collapse caused their losses?" Me: "And since the fall of Bear Stearns caused the stock price to sink, and stock losses are the primary form of damages suffered by my clients, it is accurate to say that the fall of Bear Stearns is the cause and my clients' losses are the effect. It may sound oversimplified, but proving liability and damages in litigation pretty much comes down to cause and effect."

Toward a Proximate Cause? AP reports that the June 2007 "implosion of the [Bear Stearns subprime] hedge funds foreshadowed Bear Stearns' own demise..."

By Brett Sherman

In a story published this morning - Ex-Bear Stearns managers arrested at their homes
the Associated Press reported that Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin were arrested by federal authorities on suspicion of "misleading investors about the risky subprime mortgage market."  According to the AP story, the arrests were the product of a securities fraud investigation that has been going on for more than a year.  Details of the indictment are expected later today (Thursday, June 19). 

In a recent post, I pointed out how (in my opinion), the story was one worth following closely for former Bear Stearns employee shareholders and Bear Stearns investors who suffered substantial losses and are contemplating an opt out lawsuit or other claim against BSC / JP Morgan.  From the start of the Bear meltdown, there were arguments to be made that subprime hedge fund implosions in 2007 were the starting gun for the long slide into oblivion for Bear Stearns. 

These arrests, and comments from writers who have followed the events closely (The AP, The Wall Street Journal) do not prove that the proximate cause of Bear Stearns stock losses are to be found in the 2007 hedge fund collapses or the events leading up to them.  However, each comment like this morning's pronouncement by the AP that the "implosion of the [Bear Stearns subprime] hedge funds foreshadowed Bear Stearns' own demise..." and yesterday's WSJ observation that Bear "never recovered" from the collapse of the two hedge funds are the type of comments that make the words PROXIMATE CAUSE flash before this lawyer's eyes.

More on this story as it continues to develop...  To reach Brett Sherman, call 201-723-9470, or email me at Brett.Sherman@shermanlawyers.net.

Proximate Cause of Bear Stearns' Shareholder Losses begins to come into focus.

Brett D. Sherman 

Establishing a narrow date range for proximate cause of massive Bear Stearns shareholder losses is imperative for setting damages in lawsuits.

To succeed in a lawsuit against Bear Stearns (now JP Morgan) for losses in Bear Stearns stock, lawyers who represent former Bear Stearns employee shareholders and other BSC investors need to show that one or more acts of misconduct by Bear Stearns or its employees was a "proximate cause" - a/k/a legal cause - of the near total devaluation of Bear's stock price.  Today, there were some developments on the proximate cause front.

In need of a credible proximate cause of stock losses in the Bear Stearns debacle, attorneys have been working hard to nail down the defining acts or events that spelled the beginning of the end for Bear Stearns; the point at which Bear began to slide down the slippery slope to the point at which shareholders were almost certain to take massive stock losses.  By finding a legal cause for their clients' losses, lawyers presumably would know within a relatively narrow time period when the cause had occurred.  And that knowledge is absolutely crucial to Bear Stearns shareholder litigation against Bear Stearns / JP Morgan.  Why?  Because Bear's stock price during the period when proximate cause type events were happening can be used as a benchmark range for measuring Bear Stearns shareholder damages.

For example, if the share price for BSC was $30 at the time that a shareholder's lawyer proved proximate cause and the shareholder ultimately ended up with about $10 per share, damages arguably could be limited to $20 per share.  However, if the lawyer proves that the share price was $110 when the proximate cause events occurred, then damages arguably could be $100 per share.  Of course this is a somewhat simplified way of looking at the situation, and there are certainly other factors (such as actual or imputed cost basis) that could raise or lower damages (defendants' lawyers prefer to call them losses) in both scenarios, but the main point is a very real and important one. 

Most observers have long believed that the primary suspects are the fraudulent mismanagement - of two Bear Stearns hedge funds loaded with subprime mortgage-backed secururities that failed in June 2007.  Today, the Wall Street Journal added considerable fuel to that fire.   

On June 17, 2008, The Wall Street Journal reported on a pair of criminal indictments expected to be handed down by federal prosecutors against former Bear Stearns' hedge funds managers Ralph Cioffi and Matthew Tannin.  Cioffi and Tannen ran the two subprime hedge funds that went under. According to The Wall Street Journal, the primary concerns of prosecutors seem to be  inconsistent positions about the health of the credit markets that the managers took privately, where they reportedly expressed doubts about the markets, and publicly, where they are accused of continuing to beat the drum for their hedge funds.

The Wall Street Journal Reported:

In April 2007, Mr. Cioffi exchanged emails with colleagues in which he expressed concerns about the credit markets, and wondered how a downturn might affect his investors, according to people familiar with the matter. In an April 25 call with fund investors, however, he sounded an upbeat note, telling participants he was "cautiously optimistic" about his and Mr. Tannin's ability to hedge their portfolio. "The market will stabilize," Mr. Cioffi said, adding: "We have a plan in place that will get the funds back on track to generate positive returns," according to a review of the transcript of the call. The two funds had solid financing from lenders, he said, and "significant" cash on hand. It is unclear how much money the funds actually had at the time. Mr. Tannin echoed Mr. Cioffi's reassurances, counseling investors not to be alarmed by "articles daily about how the world is coming to an end." He added, "We're quite comfortable with where we sit."  

By May 2007, with the credit markets struggling to breathe, the Bear funds began to face a flurry of margin calls that they did not meet due, in substantial part, to a shortage of cash.  Merrill Lynch actually seized assets when Bear failed to pay off margin loans. The Journal summarized the impact of the 2007 hedge fund failures as follows: 

Bear Stearns never quite recovered.

 

Following additional losses from its overall bond business and an investor panic, the 85-year-old securities firm, one of Wall Street's best-known, was subsumed into J.P. Morgan last month.

To a securities litigator's always listening ears, the Wall Street Journal's conclusion that "Bear Stearns never quite recovered" from its subprime hedge fund failures sure makes early to mid-2007 a great time  to focus on the all important mission of finding the proximate cause of Bear Stearns' shareholder stock losses. 

The Sherman Law Firm