Bear Stearns Sued to Recover Losses for Collapsed Hedge Funds

April 8, 2008 ( - The liquidators of two Bear Stearns Cos mortgage hedge funds that collapsed last year filed a lawsuit Monday seeking to recover over $1 billion in losses.

Reuters reports that Geoffrey Varga and William Cleghorn, who were appointed as liquidators of the funds in March by the Grand Court of the Cayman Islands, filed the suit against the company and its auditor, Deloitte & Touche. They are also seeking punitive damages.

The suit accuses Bear Stearns, the managers of the hedge fund, and Deloitte, of not living up to assurances that the funds were relatively safe and conservative investment vehicles, according to Reuters. The news report said the suit alleges Bear Stearns and its hedge fund managers “conceived, marketed and managed hedge funds that they knew would be viable so long as – but only so long as – the U.S. housing market continued to rise.”

The suit charges the company, the fund managers, and Deloitte with violating their fiduciary and professional duties. It claims Deloitte’s preparation of the funds’ audits was “at a minimum negligent,” according to the news report.

The Bear Stearns funds were two of at least 49 hedge funds that closed in 2007 (See Hedge Fund Closure Assets Reach $18B ). A number of hedge funds last summer fell victim to the crisis in the subprime mortgage market (See Two Hedge Funds Fall Victim to Subprime Mortgage Woes ).

Bear Stearns is facing other legal battles since it was announced the bank is being acquired by JPMorgan Chase (See NYC Comptroller to Look at Bear Stearns Role in Pension Loss ).