In the most high-profile lawsuit to date resulting from the $1.6 billion collapse of two Bear Stearns’ hedge funds, last month Barclays filed a 75-page claim against Bear Sterns Asset Management (BSAM) in the U.S. District Court (Southern District of New York) for unspecified damages.
The two funds—Bear Stearns’ High Grade Structured Credit Strategies Master Fund and High Grade Structured Credit Strategies Enhanced Leveraged Master Fund—collapsed in the wake of the subprime mortgage crisis and were wound up on 30 July last year.
Barclays, which provided a $400 million loan to the Enhanced Leveraged Fund, alleges that BSAM “repeatedly and fraudulently” misled Barclays about the financial performance of the fund in order to gain increased funding. It describes the collapse as “one of the most high-profile and shocking hedge fund failures of the last decade.”
Specifically, Barclays alleges that Ralph Cioffi, a Bear Stearns senior portfolio manager and colleague Matthew Tannin, who together were responsible for managing the Enhanced Leveraged Fund, knew that the fund’s assets were worth “far less” than the values stated before the fund’s collapse and concealed the loss in value from Barclays. This cover up, says Barclays, “only caused greater losses and a more spectacular collapse of the fund.”
Meanwhile, Bear Stearns is also facing a new wave of U.S. investor claims launched by U.S. securities class action law firms. According to Reuters, at least 11 claims have been submitted to the U.S. Financial Industry Regulatory Authority (FINRA) for arbitration, representing $62 million in investor losses. One claim involves a Cayman Islands-domiciled fund of funds manager that lost $1 million.
Separately, another investor, New York-based investment fund, Navigator Capital Partners has filed a claim against the bank after claiming it lost nearly all its $700,000 investment.
In related developments, the U.S. Securities and Exchange Commission is investigating whether Ralph Cioffi was engaged in insider training by removing $2 million of his own investments out of the now-insolvent funds into another Bear Stearns-managed fund. The Massachusetts Regulator has also charged Bear Stearns with “inappropriate trading” of securities.
To read the Barclay’s claim in full, see the court documents.
ABOUT YOUR PUBLISHER, FSI:
FSI is a well known law firm with specialist expertise in relation to enquiries and investigations instigated by the FSA and overseas regulators, including AMF in France and the SEC in the US. Often working in conjunction with compliance specialists and other professional advisers, the team will attend interviews at the FSA, advise on all correspondence with the FSA and represent their clients before the Regulatory Decisions Committee and the Financial Services Markets Tribunal. For further information on how we might be able to help you, please contact head of team, Philip Rubens:
Philip Rubens is head of the financial services team at FSI. Having undertaken a secondment at the FSA, Philip is a leading expert in the regulatory enforcement field.