Back in July 2007, Bear Stearns “burned up $1.6 billion” of money that was invested in two of its hedge funds: High-Grade Structured Credit Strategies Fund and the High-Grade Structured Credit Strategies Enhanced Leverage (Overseas) Fund, according to a December 6, 2007 article by Darla Mercado in Investment News. The hedge funds were invested in risky mortgage-backed securities that contain subprime debt. Bear Stearns halted redemptions and the funds collapsed. The first investor claims involving these funds were filed this summer. Now a second wave has hit.
On December 5th, 11 investors with combined losses of $62 million in the funds filed securities arbitrations claims against Bear Stearns with the Financial Industry Regulatory Authority (FINRA), according to December 6 articles in the New York Times and Reuters as reported in the Daily News (White Plains, NY), as well as the Mercado article. Attorneys for the investors said that Bear Stearns continued selling the funds this spring as the subprime mortgage market imploded, the articles reported.
Long considered as one of Wall Street’s savviest underwriters of mortgage-backed securities, Bear Stearns knew or should have known that the market for these securities had become extremely unstable, said attorney Ryan Bakhtiari of Aidikoff, Uhl & Bakhtiari, as reported by Reuters. “Officials at Bear Stearns engaged in a concerted effort to conceal the true state of affairs at both of these hedge funds for an extended period of time before they imploded,” said Steve Caruso, a New York-based attorney at Maddox Hargett and Caruso P.C.
The claims further allege that Bear Stearns improperly failed to disclose “related-party” transactions between its hedge funds and other Bear Stearns divisions, as well as the risks of the illiquid securities held by the funds. The claims come three weeks after Massachusetts regulators charged Bear Stearns with engaging in related-party transactions without obtaining approvals from independent directors, Reuters reported.
One of the claimants is a Cayman Islands fund-of-hedge funds manager who lost approximately $1 million in the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage (Overseas) Fund, according to the articles. This claimant invested in March 2007, when the subprime mortgage market was already showing signs of strain. By June, there were rumors of steep declines in subprime-laden mortgage-backed securities. On June 22nd, Bear Stearns confirmed that margin calls were draining liquidity from the two hedge funds. The funds filed for bankruptcy in July.
The affiliated law firms of Aidikoff, Uhl & Bakhtiari; Maddox, Hargett & Caruso, P.C.; David P. Meyer & Associates Co., LPA; and Page Perry are representing investors who lost money in the collapse of the sub-prime mortgage market and related structured investments, including the Bear Stearns hedge funds. The firms concentrate their law practices on the arbitration and trial of consumer and securities matters. For further information, see www.subprimelosses.com.