Barclays to sue over hedge fund collapse

Published on Thursday 20 December 2007 09:48

BARCLAYS has filed a fraud lawsuit against Wall Street investment banking giant Bear Stearns over the failure of a hedge fund.

But the US bank claimed that the suit was a move by Barclays to mask responsibility for its own judgement.

Britain's third-biggest bank, which was the sole investor in the fund, alleges that Bear Stearns misrepresented the health of a hedge fund it was lured into investing in.

Two of Bear Stearns' hedge funds collapsed in June in what many analysts now view as the first sign of the seriousness of the sub-prime mortgage market crisis that began in the US but which has affected banks across the world.

Barclays – which claims that Bear misrepresented the health of its hedge fund business for more than nine months before the collapse – did not put a figure on the damages it is seeking, but analysts reckon it could be between 150 million and 200m.

The 75-page complaint said that because the New York securities firm withheld information that Barclays claimed it was entitled to, it could not yet determine what it was seeking as recompense for Bears' alleged "misconduct".

Filed in a New York court, the suit claims Bear had used its High-Grade Structured Credit Strategies Enhanced Leverage Master Fund (ELFM), which had exposure to risky sub-prime mortgages, as a "repository for risky, poor-quality investments" just weeks before it collapsed.

Barclays said the respected Wall Street institution, along with Ralph Cioffi, the senior portfolio manager who at the time led the high grade structure credit strategies group at Bear but who has now left the group, had "long known" the assets were worth "far less" that their stated value and were at risk of further losses.

The suit comes after months of discussions between the banks failed to reach an agreement.

"Bear Stearns . . . used the Enhanced Fund as a place to unload excessively risky or troubled assets that could not be sold to other investors at the prices paid by the Enhanced Fund," Barclays said in its complaint.

Barclays admits it received regular updates on the fund, but claims Bear was "still intentionally, or at a minimum recklessly, misstating the portfolio's status as of June 2007" as it began to take on losses.

The complaint also states that Bear told Barclays that the ELMF was up almost six per cent through June – when "in reality, the portfolio's asset values were plummeting".

Bear said: "While we have not yet seen the lawsuit, we believe that any such lawsuit filed by Barclays is unjustified and without merit. We believe this lawsuit is an attempt by Barclays to avoid taking responsibility for its own actions."

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