(CN) - A New York federal judge last week reluctantly backed a Securities and Exchange Commission "chump change" settlement against two men whose mismanagement of two Bear Stearns hedge funds allegedly cost investors $1.6 billion in losses, but asked lawmakers to do more to protect victims against Wall Street "predators."
     In the summer of 2008, the government charged hedge fund managers Ralph Cioffi and Matthew Tannin with securities fraud and wire fraud, alleging that they had misrepresented the health of two Bear Stearns hedge funds, which in reality were on the verge of collapse.
     In late 2009, the two money managers were acquitted of criminal charges after a jury trial. But the SEC then pursued civil claims against the two men and reached a settlement before the case went to trial.
     The proposed $800,000 penalty against Cioffi and and a $250,000 fine against Tannin were slammed as "'chump change'" by the U.S. District Court Eastern District of New York earlier this year.
     But in his 19-page memorandum, senior judge Fredric Block said the court was "constrained" to approve the settlement because lawmakers in Washington had given the SEC "limited powers" to recover investor losses. As things stand, Block wrote, "many believe that the SEC is simply not up to the task of enforcing securities laws."
     The judge noted that the SEC civil enforcement authority "necessarily provides a paltry monetary remedy" in cases where investors losses dwarf defendants' gains.
     Block said the obstacles that Congress had placed in front of investors through the Privates Securities Litigation Reform Act (PSLRA) made it difficult for investors to pursue claims through private attorneys.
     "Given this sorry state of affairs, Congress may wish to consider broadening the SEC's power to recover amounts more reflective of investor losses, and to require any moneys recovered to be paid into fair funds for investors' benefit. It has, for example, empowered the Commodities Futures Trading Commission - the agency overseeing commodities trading - to assess 'actual damages caused by [a] violation [of the commodities laws],' and, in cases of 'willful and intentional' violations, punitive damages 'equal to no more than two times the amount of such actual damages.' ... Given the obvious parallels between commodities trading and securities trading, Congress could easily grant the SEC the same authority," Block wrote.
     "For now, however, the court must accept the SEC's enforcement authority as it currently stands. Regrettably, that authority leaves investors out in the cold," the judge added.
     Block said that since loss recovery for the investors was "out of the picture," penalties against the two money managers could only be "measured against the defendants' alleged gains." Those gains amounted to $2 million for Cioffi and $750,000 for Tannin, the judge wrote.
     "The recovery of $800,000 from Cioffi and $250,000 from Tannin represents a sizable percentage of the outer limits the SEC could have reasonably expected to recover from a verdict in its favor," Block wrote.
     "A district court is surely not required to rubber stamp every settlement between the SEC and a defendant," the judge concluded. "But its role is restricted to assessing whether the settlement is fair, reasonable and adequate within the limitations Congress has imposed on the SEC to recover investor losses. Since the court is satisfied that that standard has been met, it will reluctantly sign the proposed consent judgments."
     Cioffi is also barred from working in the securities industry for three years, while Tannin received a two year ban.