Will any Wall Streeters go to jail for this?

Of all the potential Wall Street perps, the only defendants so far are two Bear Stearns managers, who head for trial next month. Why vengeance over the financial crisis is so elusive.

By William D. Cohan, contributor

(Fortune Magazine) -- In "Candide," the philosopher Voltaire explained how the British once executed one of their own admirals who lost an important battle "pour encourager les autres" -- to encourage the others not to dare repeat such a public failure. At present, there has been nothing remotely like that level of accountability for the Wall Street executives who led their firms -- and nearly American capitalism -- into the financial abyss. Aside from losing a large percentage of their sizable fortunes, neither Jimmy Cayne of Bear Stearns nor Dick Fuld of Lehman Brothers has found himself anywhere near the stockade. In such previous scandals as Enron and WorldCom, top executives went to jail, but this situation is less clear-cut in part because Wall Street was just playing by the regulatory rules that it helped write.

Only two men, Ralph Cioffi and Matthew Tannin, who together ran two Bear Stearns hedge funds that went bust in July 2007, have been indicted on criminal charges. The liquidation of the funds, which had invested heavily in mortgage-backed securities, not only cost investors upwards of $1.6 billion but also revealed just how toxic those assets had become by the summer of 2007. Cioffi and Tannin have been charged with conspiracy and fraud, largely for presenting investors with a rosy picture of a deteriorating situation, while Cioffi was also indicted on charges of insider trading for secretly moving $2 million of his own money from one of the doomed hedge funds into another fund he managed that was doing a little better.

The defendants and their attorneys have a different view of what happened, which can be summed up simply as a case of poor judgment in a highly uncertain and volatile market, rather than as an example of criminal behavior. Like many people in the spring of 2007, their argument goes, Cioffi and Tannin saw the cracks in the market for mortgage-backed securities as a buying opportunity rather than the tip of the iceberg they were about to hit. They guessed wrong. Both deny any wrongdoing.

What passes for the truth may be revealed when their trial gets underway Oct. 12 in a federal courthouse in Brooklyn, unless they reach a settlement with the government before then -- a course of action that so far their attorneys have steadfastly resisted. The jury of their peers that will be assembled in downtown Brooklyn will provide an interesting litmus test for the public's appetite to assign blame for the financial crisis. The case has also been seen as a possible template for any further prosecutions.

But will there be any? Another prime hunting ground for prosecutors is Lehman Brothers. For much of the past year, three federal grand juries -- in Manhattan, Brooklyn, and Newark -- have reportedly been investigating possible criminal activity among a group of top Lehman executives related to the firm's efforts to raise capital in the months leading up to its collapse. The U.S. attorneys involved in these probes aren't talking, but speculation focuses on former Lehman executives Fuld and the firm's last two CFOs, Erin Callan and Ian Lowitt, since they were the ones who had to stoke public confidence in an embattled firm. Now, of course, they are not talking. Fuld is at hedge fund Matrix Advisers, supposedly trying to drum up business for the firm. Callan, who took a job in July 2008 as a banker covering hedge funds at Credit Suisse (CS), is on leave from the firm. Lowitt has a new job as chief operating officer of Barclays Wealth, Americas.

At the beginning of the year, various combinations of federal and state prosecutors were reported to be looking for potential defendants in such disasters as AIG (AIG, Fortune 500), Fannie Mae (FNM, Fortune 500), Merrill Lynch, and Washington Mutual. But so far, no new perps have been walked. If the criminal probes sputter out, which they often do without any public notice, victims may be able to find whatever consolation is available to them only in civil courts, where many lawsuits are pending against, among others, AIG, Bank of America (BAC, Fortune 500), and Wachovia. Still and all, not much has been accomplished -- yet -- from a judicial perspective to encourage Wall Streeters not to engage in a repeat of this kind of behavior.  To top of page

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