Barclays Bank sues Bear Stearns for fund collapse

20 December 2007

Barclays Bank, a unit of the London-based Barclays plc, the UK's third- biggest bank, has sued Bear Stearns over losses caused by the collapse earlier this year of a hedge fund that invested in sub-prime mortgages. The complaint was filed on Wednesday 19 December in a Manhattan federal court.

The bank claims the New York-based securities firm hid negative financial information about the collapsed fund. Barclays says it was the "sole participating shareholder" of the fund. The collapse was "one of the most high-profile and shocking hedge fund failures in the last decade", says the complaint, which seeks unspecified damages.

The manager of the fund Ralph Cioffi left Bear Stearns last week, but US prosecutors are investigating whether he withdrew money from the fund. He is a defendant in the Barclays suit along with Matthew Tannin, a senior managing director at Bear Stearns Asset Management.

The suit alleges fraud, conspiracy and breach of fiduciary duty. It includes a February e-mail to Barclays in which Tannin is supposed to have said that the fund is "having our best month ever" and that its "hedges are working beautifully".

At this point, the fund was having "severe" liquidity problems, says Barclays. In March, the British bank made a second investment in the fund. But a Bear Stearns representative said the lawsuit was an attempt by Barclays to avoid taking responsibility for its own actions.

Bear Stearns says the fund shared portfolio data with Barclays. It says that the UK bank made its own assessments that did not anticipate what, in hindsight, turned out to be a historically difficult market.