Several investors in a failed Bear Stearns Hedge Fund recently filed arbitration claims against two subsidiaries of Bear Stearns Companies, Inc. -- Bear Stearns & Co., Inc. and Bear Stearns Securities Corp. The investors are represented by a group of four law firms with extensive arbitration experience against hedge funds. The fund at issue -- the Bear Stearns High Grade Structured Credit Strategies Enhanced Leverage (Overseas) Fund -- is one of two Bear Stearns hedge funds that filed for bankruptcy earlier this year after suffering heavy losses from their investments in sub-prime debt.
Investors claim that Bear Stearns failed to adequately disclose related party transactions. They also claim that Bear Stearns withheld information about the scope of risk that the hedge fund had assumed as a result of its sub-prime investments. The investors believe that there was a "concerted effort" on the part of Bear Stearns to mislead investors about those risks. They further claim that Bear Stearns either knew or should have known the full extent of the hedge fund's sub-prime exposure, but failed to adequately warn investors.
The investor claims come on the heels of a recent administrative action filed by Massachusetts Secretary of the Commonwealth William Galvin. The Massachusetts' Administrative Complaint, a copy of which is attached here, accuses Bear Stearns of improperly trading mortgage-backed securities between its own accounts and the two failed hedge funds. Unlike the arbitration claims described above, the Administrative Complaint focuses almost exclusively on Bear Stearns Asset Management, Inc.'s ("BSAM") alleged failure to implement federally mandated procedures concerning trading between Bear Stearns and the two hedge funds.
Specifically, BSAM is accused of failing to make the proper disclosures to independent directors about trades between Bear Stearns in its own accounts and the hedge funds managed by it. The Complaint seeks an Order requiring BSAM to permanently cease and desist from the violations complained of therein, censuring BSAM, imposing administrative fines and ordering any further actions that the Director or Hearing Officer overseeing the action deems just and appropriate for the protection of investors.
We will continue to monitor developments with respect to this and other sub-prime related matters and report them to you on www.InsureReinsure.com.