Hedge fund collapse causes Barclays to sue

by Richard Kilner

Story link: Hedge fund collapse causes Barclays to sue

Bear Stearns, the Wall Street bank, is being sued by Barclays after a hedge fund the firm invested in failed.

However, Stearns has retaliated by claiming the filing of a lawsuit is simply to decoy to try and draw attention from Barclays’ poor judgement.

Barclays was the only investor in the hedge fund and has alleged that Stearns did not accurately depict the fund’s state of health.

Earlier this year, in June, a pair of Stearns’ hedge funds collapsed.

Barclays claim that Stearns misled the firm about the fund’s status for more than nine months prior to its collapse.

Currently there is no official figure on the damages sought in the action, though it is speculated to be around £150-200m.

The lack of official damages sought is explained by Barclays’ assertion that it was denied information it was entitled to and so could not say at present what compensation it deserved.

The fund was exposed to sub-prime mortgages, and, it is claimed, was used by Stearns as a repository for highly risky, poor quality investments weeks before it collapses.

Stearns are accused of knowing that the fund’s value was overestimated and of knowing that further future losses were highly likely. Ralph Cioffi, who was a senior portfolio manager at the time but has since left the US bank, is also accused of being in the know.

The two banks have spent months in talks aimed at achieving an agreement, and their failure to do so has led to this suit.

Barclays has confirmed it was regularly kept up to date on the fund’s status, but believes that Stearns intentionally, or recklessly, reported the fund’s status inaccurately from June of this year onwards.

One such example is the claim that Stearns told Barclays the fund has risen by 6% in June, when in fact it was falling.