Let the litigation begin!

Thursday, December 20, 2007 | 06:50 AM

Thus, It Begins:

I believe Barclays is now the first big plaintiff against the major Wall Street brokerage houses.

The United Kingdom bank was burned this summer when they lent $400 million to the firm's funds, whose collapse wiped out $1.6 billion in capital.

Barclay's is essentially claiming fraud, that Bear misled it about the performance of the highly leveraged funds at the time they were collapsing, and Bear was out raising lines of credit and seeking loans to shore the funds up:

"As the High-Grade funds faltered, the Barclays complaint alleges, their desperate state was concealed from bank officials, whose calls and emails were dodged as they sought performance information. "It is now clear that the BSAM defendants have long known that the Enhanced Fund and its underlying assets were worth far less than their stated values in the early months of 2007," asserts the complaint, referring to Messrs. Cioffi and Tannin, "and were at great risk for further losses."

The fund managers concealed their performance numbers from Barclays and others, says the suit, actions that worsened losses and contributed to the riskier fund's collapse. They also made false promises about savvy risk management and open communication to win loan money from the bank, alleges the suit, treating Barclays as a naïve player that was "an easy liquidity source," according to one email that Mr. Cioffi sent to Mr. Tannin. Months later, at a dinner celebrating Barclays's loan to the newly formed enhanced-leverage fund, Mr. Tannin told the British bank's officials that the fund was performing "great," adds the suit."

Even if the allegations are true, the main question is whether the fraud was perpetrated by Bear itself, or by a separate, independent unit.

One other thing: the complaint was filed in U.S. District Court in Manhattan. We will see if the August ploy of liquidating those two bankrupt hedge funds in the Cayman Islands will have any applicability to this claim.


And in totally-unrelated-completely-having-nothing-to-do-with-this-whatsoever news, Bear Stearns is expected to report its first ever quarterly loss today. Look for additional writedowns to its previously announced  $1.2 billion hit . . .

Barclays Sues Bear Over Failed Funds
WSJ, December 20, 2007; Page C3

Thursday, December 20, 2007 | 06:50 AM | Permalink | Comments (12) | TrackBack (0)
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Perhaps the legal system can accomplish what the financial regulators are incapable.

Posted by: blam | Dec 20, 2007 7:28:52 AM

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