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Subprime Players Set for Perp Walk

The two former hedge fund managers for Bear Stearns arrested today on securities fraud charges stemming from the subprime mortgage meltdown will face even further recrimination: They’ll be subject to the famous criminal “perp walk,” NPR says.

Ralph Cioffi and Matthew Tannin are the highest-profile Wall Street players to face criminal charges due to the mortgage crisis. NPR, which broke the story of their pending indictments, says the men are charged with misleading investors in 2007 by telling them all was well with two hedge funds. Meanwhile, both were emailing colleagues to say privately that they were worried about the mortgage market. The hedge funds comprised mainly mortgage-backed securities, and they went under as the subprime market imploded due to high default rates. Investors lost some $1.6 billion, NPR said. The Federal Reserve eventually stepped in to engineer a bailout and the sale of Bear Stearns to JPMorgan Chase.

As Law.com points out, perp walks were once reserved for violent criminals who threatened the safety and security of the community. In recent years, however, they’ve become staged media events — especially when it comes to white-collar crimes:

This trend of formally arresting those accused of white-collar crimes and subjecting them to the spectacle of the perp walk escalated following the Enron debacle. Take, for example, the front-page arrests of ImClone System Inc.’s Sam Waksal and Adelphia Communication Corp.’s John Rigas, among others, although their lawyers urged voluntary surrenders in meetings with prosecutors.

Prosecutors used to let white-collar criminals voluntarily turn themselves in, and were criticized for giving unequal treatment. Now government prosecutors use the perp walk to send a message to corporate officials that they won’t be considered above the law if they get in trouble. And, of course, the idea is to put pressure on the people under arrest. Law.com points out that most people blame former New York Mayor Rudy Giuliani for the transformation of the perp walk into a white-collar ritual. He made it his trademark during his tenure as a U.S. attorney in New York in the 1980s. Using the perp walk in a case involving the subprime mess sends a strong message. It’s meant to be cathartic in some ways; people who never miss their fixed-rate mortgage payments and who have watched their home values fall would like to see someone paying for this debacle, especially if they were directly involved. It also means federal authorities are taking mortgage and securities fraud in the subprime market seriously, and no doubt more investigations and arrests will be coming.

The question now is whether prosecutors will turn to lenders who made loans on misleading terms, and even to borrowers who lied to get loans. In the past, the FBI has said it wouldn’t go after individual borrowers for lying about their incomes. But now there are things like “buy and bail” schemes, in which borrowers with good credit buy new homes at foreclosed sale prices and “bail” on their original homes, since they owe more on the mortgage than the homes are worth.

They shouldn’t assume they’ll get away it, nor should anyone else. If prosecutors are pulling the perp walk in their first high-profile subprime case, it could mean more walks of shame are on the way — for everyone involved in the mortgage mess.

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