ALLEGED 2007 SUBPRIME HEDGE FUND FRAUD LOOKING MORE AND MORE LIKE PROXIMATE CAUSE OF STOCK LOSSES SUFFERED BY BEAR STEARNS EMPLOYEE SHAREHOLDERS AND OTHER BEAR INVESTORS.
In the aftermath of yesterday's arrest of two senior Bear Stearns hedge fund managers, a consensus seems to be building in the financial press, among economists, and (perhaps most importantly) among FBI agents, U.S. Attorneys, the SEC, and other securities enforcement officials. The widely held opinion is that serious misconduct in early to mid 2007 by two Bear subprime hedge fund managers and others at Bear Stearns initiated a chain reaction that culminated in the disastrous end of the once proud and independent investment bank.
In several previous posts this week, the Bear Stearns Law Blog has written about the concept of proximate cause. If the allegations in the indictment against Ralph Cioffi and Matthew Tannin (the two Bear fund managers arrested yesterday) are true, it is virtually certain that they and other senior management personnel at Bear Stearns proximately caused the massive losses suffered by investors in the two failed subprime funds.
However, the financial damages Cioffi, Tannin and Bear Stearns caused with their misconduct during the first half of 2007 may extend much further than billion dollar losses in Bear Stearns hedge funds. In fact, the very same misconduct for which Cioffi and Tannin were indicted may prove to be the proximate cause of nearly all losses that Bear Stearns shareholders suffered as the the company's stock price went from about $150 in April 2007 to $10 in the spring of 2008.
On June 19, 2008, The New York Times offered the same ultimate conclusion that the Wall Street Journal and AP had reached on the previous two days, reporting that the collapse of the hedge funds "culminated in the demise of Bear Stearns itself." It is a fact that the Bear Stearns stock price fell in lockstep with the misfortunes of the company. Therefore, if subprime hedge fund misconduct at Bear Stearns ultimately destroyed the company itself, then that very same hedge fund misconduct simply has to be responsible for the near total devaluation of Bear Stearn's stock price and the accompanying losses suffered by Bear Stearns shareholders. If this is so, JP Morgan may be staring down the barrel of a liability shotgun.
Imagine you are a Bear shareholder. If you suspect that the company is lying to the public about deteriorating finances, wouldn't you unload your holdings (assuming your stock is not restricted or otherwise subject to a lock-up)? If the answer is yes (and how could it not be) then you wouldn't have suffered Bear stock losses because you would have sold out way back in March or April of 2007. Now, if you take this very basic logic and reverse it, you can see that you would not have lost money in Bear Stearns stock but for the fact that the hedge fund fraud was concealed from you.
Depending on the underlying facts, some Bear Stearns shareholders may have damages claims of $140 per share or more. If enough shareholders with large Bear Stearns stock losses file lawsuits, perhaps JP Morgan may eventually rethink how much of a fire sale price it really got with the Bear Stearns acquisition.
The Sherman Law Firm
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