On December 19, 2007, Barclays, PLC, Britain’s third largest bank, filed a lawsuit against Bear Stearns in federal court over sub-prime losses from a failed Bear Stearns hedge fund. As we reported earlier this year, two hedge funds managed by Bear Stearns went bankrupt this summer because their investments were highly concentrated in the sub-prime market. Since that time, several federal and state regulators have begun investigations into the failure of those hedge funds and investors in one of the hedge funds have filed arbitration claims. Now Barclays has filed this action in federal court based on losses it suffered from the other failed hedge fund.
The action, entitled Barclays, PLC v. Bear Stearns Asset Mgmt. Inc., et al., No. 07-CV-1140 (S.D.N.Y.), was filed against Bear Stearns Asset Management Inc. (“BSAM”), two senior managing directors at BSAM, Bear Stearns & Co. and The Bear Stearns Companies Inc. A copy of the Complaint is available here. The lawsuit accuses these defendants of concealing known problems in the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund, Ltd. (the “Enhanced Fund”). According to Barclays, it is the sole-shareholder in the Enhanced Fund.
Barclays claims that the defendants “repeatedly and fraudulently misled Barclays” in order to: (1) induce Barclays to make its initial investment in the Enhanced Fund in March 2006; (2) secure increased financial commitments from Barclays in March 2007; and (3) induce Barclays not to liquidate its position in the Enhanced Fund through June 2007.
Specifically, Barclays claims that the defendants deliberately overstated the value of the sub-prime mortgage securities held by the Enhanced Fund and hid from Barclays known liquidity problems. Moreover, Barclays claims that the defendants knew in early 2007 that the underlying assets held by the Enhanced Fund were worth “far less than their stated values.” Barclays claims that BSAM, therefore, deliberately concealed the falling net asset value for the Enhanced Fund throughout 2007.
Based on these allegations, Barclays alleges claims of fraud and deceit, negligent misrepresentation, civil conspiracy to commit fraud, breach of fiduciary duty, gross negligence, negligence, promissory estoppel, aiding and abetting breach of fiduciary duty and civil conspiracy.