A misrepresentation of two Bear Stearns hedge funds cost Bank of America investors upwards of $1 billion, according to a lawsuit filed in Manhattan District Court. Bank of America’s lawyers allege that the asset-management unit of Bear Stearns marketed two hedge funds as sound investments in the spring of 2007, even though both funds had suffered massive withdrawal requests and were teetering on the verge of collapse.
In May of 2007, Bank of America made a $4 billion securitization in mortgage-backed assets owned by two Bear Stearns-managed hedge funds. One month later, the two funds—called Bear Stearns High Grade Structured Credit Strategies Master Fund and Bear Stearns High Grade Structured Credit Strategies Enhanced Master Fund—plummeted in value. Bank of America alleges that Bear Stearns’s managers anticipated this eventuality, and concealed it from investors.
The three defendants in the case are Raymond McGarrigal, a former manager at Bear Stearns, and Ralph Cioffi and Matthew Tannin, managers of the funds. Cioffi and Tannin have also been charged with securities fraud by federal prosecutors in Brooklyn.
Bear Stearns collapsed in the spring of 2008 after a failed federal effort to revitalize the ailing investment bank. It was purchased by JP Morgan Chase with assistance of the federal government in May. The episode was the first major casualty of the credit crisis.