The Massachusetts Secretary of the Commonwealth confirmed on Friday October 19, 2007 that it is investigating certain trades in two failed Bear Stearns funds. The investigation, which was first reported in the Wall Street Journal last week, involves trades between Bear Stearns and two hedge funds managed by Bear Stearns that may have been made without the proper disclosures to the funds' independent directors.

Bear Stearns has faced intense scrutiny over these two funds since their collapse earlier this year. The two funds, Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd. and Bear Stearns High Grade Structured Credit Strategies Enhanced leverage Master Fund Ltd., went bankrupt after suffering substantial losses from investments in the subprime mortgage market.

The failure of these funds was significant. As we reported in August, Bear Stearns even hired a law firm to investigate the losses suffered by the two funds after it was unable to rescue one of the funds despite an unprecedented $1.6 billion in loans (see here). Since that time, Bear Stearns has also faced at least one government investigation and a civil suit concerning the collapse of the two funds. The Securities Exchange Commission is reportedly conducting an informal investigation into the management of the two funds and Navigator Capital Partners, a limited partner in one of the funds, has sued Bear Stearns over its losses.

We will continue to monitor these and other developments related to the subprime mortgage crisis and report on those developments here at