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Hedge funds: Investors Sue Bear Stearns over Losses
Euromoney
By Helen Avery
September 1, 2007

Securities arbitration lawyer Jake Zamansky, at law firm Zamanksy and Associates, which is leading the case, alleges that investors were told that 7% of the fund was invested in sub-prime. However, there are indications that the proportion was more than 50%. The complaint also alleges that Bear Stearns misrepresented the risk controls in place.

"The funds were pitched as conservative investments," says Zamansky. "Investors were told that the funds were 90% triple-A and double-A rated, and that downside losses could only reach 10%, not zero. Had they known the extent of the risk involved, they would not have invested." Finally, the complaint alleges that Bear Stearns misrepresented the deteriorating performance of the funds on conference calls to investors to prevent "a run on the bank".

Zamansky is representing institutional investors, funds of hedge funds and high-net-worth investors in the case. "At present there are more than two dozen investors from the UK, Europe and the US that we are representing," he says. "But there were several hundred investors in the fund, and I expect there to be other cases." Investors are seeking losses returned, and punitive damages of $100 million plus attorneys' fees.

The first case in arbitration has been filed before the Financial Regulatory Authority (Finra), and the law firm has asked for documents and emails between Bear Stearns and the ratings agencies in order to prove the case. Zamansky expects a trial in arbitration to take place in mid-2008.

Zamansky says the case highlights the lack of transparency in the hedge fund industry. "There are no exact disclosure requirements, and I think this will encourage the SEC to take a closer look at regulating the industry." The SEC has launched its own investigation into Bear Stearns' collapsed funds.

In August, Bear Stearns' two hedge funds - the High Grade Structured Credit Strategies Fund and the High Grade Structured Credit Strategies Enhanced Leverage Fund - filed for bankruptcy protection.

Bear Stearns did not return calls asking for comment.

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