Bear Stearns Suit Enters Bankruptcy Court

April 27, 2001 ( - A lawsuit against Bear Stearns is fuelling the debate over how much responsibility a prime broker should bear regarding the fraudulent conduct of its hedge fund clients.

The lawsuit is being filed against Bear Stearns by investors in a failed hedge fund, on the heels of a US judges’ dismissal of an earlier complaint against the investment bank on the grounds that investors did provide sufficient proof to support their charges.

The new suit against the investment bank, which served as the Manhattan Investment Fund’s prime broker, is being filed in bankruptcy court and will attempt to prove the broker guilty of fraudulent conveyance as opposed to proving its direct participation in the fraud, as was argued in the prior suit.

Lawyers for the hedge fund’s investors will argue that the broker continued to charge expensive fees, despite being aware of the fund’s insolvency, and in so doing, depleted the fund’s assets and deprived creditors of an adequate recovery once the fund failed.

The head of the hedge fund pleaded guilty last year to securities fraud after forging performance results to conceal the $400 million in losses it incurred by taking short positions against new economy stocks.

Investors claim that the brokers were aware of fraud but continued to lend money to the fund and clear its trades in order to secure commissions.

It is also charged that Bear used this information to warn certain clients about the fund’s condition and that the broker knew that by continuing to support the fund, it was allowing the fraud to continue.

– Camilla Klein