Legal Action Begins Over Bear Sterns Hedge Funds

by Carla Johnson, Investors Offshore.com, London

07 August 2007

After Bear Sterns filed bankruptcy petitions for its two devastated hedge funds in the US and the Cayman Islands last week, court papers began to throw light on the sequence of events that led to the funds' demise.

The Bear Stearns High-Grade Structured Credit Strategies Master Fund and the Bear Stearns High-Grad Structured Credit Strategies Enhanced Leverage Master Fund, which invested in sub-prime securities, filed in the US under Chapter 15 of the bankruptcy code, and in the Cayman Islands where they are registered, like virtually all the 10,000 hedge funds in existence.

Simon L C Whicker and Kristen Beighton of KPMG were appointed by the Cayman Islands Grand Court as joint provisional liquidators at the hearing last week. Applying for Chapter 15 bankruptcy in New York, which covers cross-border liquidations, lawyers told the court that most of the funds' assets are in the US and a local court will probably be needed to oblige creditors to to turn over assets they are holding to the Cayman Islands liquidators.

It has emerged that most of the assets of the two shuttered funds had been re-possessed by secured creditors, including Merrill Lynch and Bear Sterns itself, during the period before their bankruptcy. Last week, Bear Sterns also suspended redemptions in a third fund, the $900 million Bear Stearns Asset-Backed Securities Fund, although Bear Sterns said that the fund had only a tiny exposure to the sub-prime mortgage market.

Also last week, some investors in the two bankrupt funds began legal action against Bear Sterns. Law firms Zamansky & Associates and Rich & Intelisano filed an arbitration claim with the National Association of Securities Dealers alleging that Bear Stearns misled investors about its exposure to the funds.

Attorney Jake Zamansky said: "This case underscores the need for transparency in hedge funds, and possible regulation. Bear Stearns said they had a sophisticated surveillance system to monitor risk in these investments, and someone was asleep at the wheel."

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