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Bob Moon: We’re glad to have you with us on this Thursday, the 19th of June, and if you were hoping you’d heard the last of the damage caused by mortgage-backed securities, sorry to say there’s more to come.
Citigroup’s shares crumbled more than 4 percent after the bank warned investors to expect more write-downs and the FBI arrested two former Bear Stearns executives on charges of securities fraud. They’re accused of misleading investors about the state of two hedge funds that bought lots of mortgage-backed bonds. The executives may also have lied about the amount of their own money they invested in the funds.
This news is casting a long shadow down Wall Street and raising a potentially profit-killing question: How can you trust what any of these financial folks say?
Marketplace’s Jill Barshay reports.
Jill Barshay: Hedge fund investors may be wealthier than the rest of us, but U.S. Attorney Ben Campbell says they’re entitled to the same protections.
Ben Campbell: Honesty and integrity are the foundations upon which our financial markets function. Hedge fund investors, like all investors in the securities markets, are entitled to rely on those to whom they entrust their money.
The Bear Stearns executives who managed the hedge funds told investors they were cautiously optimistic about the mortgage market, but then the hedge funds blew up.
So after the Enron and Worldcom frauds, the equity analysts’ lies and now this, can we ever trust anything anyone says on Wall Street anymore?
Lane Carrick is the chief executive of Sovereign Wealth Management. He says he never takes anything hedge fund managers say at face value.
Lane Carrick: The term “cautiously optimistic” would be meaningless to me as an investor.
Carrick says he focuses on numbers more than words.
Carrick: I guess it would be a little Reaganesque in that it would be trust but verify.
Sophisticated investors like the people who invest in hedge funds are supposed to know what they’re getting into. Ira Press is a securities litigator at Kirby McInerney.
Ira Press: There is a doctrine called “truth on the market,” which essentially means that a manager is not liable for securities fraud even if they publicly lie if in fact the true state of affairs should have been ascertainable to investors through other sources.
Press doesn’t think all investment managers are liars. He says fraud occurs in a very tiny percentage of securities transactions.
In New York, I’m Jill Barshay for Marketplace.