Tuesday, June 17, 2008

Barclays Bear Stearns Complaint May Assist US Attorney

A complaint by Barclays PLC, the U.K.'s third-biggest bank, over the implosion of two Bear Stearns Cos. hedge funds that invested in subprime mortgages may help guide prosecutors probing whether executives broke the law.

Barclays Bank PLC, a unit of London-based Barclays, claimed it lost "hundreds of millions of dollars'' in one fund because Bear Stearns Asset Management Inc. and two managers hid negative financial information, according to a complaint amended June 6 in federal court in New York. Managers Ralph Cioffi and Matthew Tannin might be criminally charged within a week, the Wall Street Journal reported yesterday, citing unidentified people familiar with the case.

The U.S. Justice Department is examining the collapse of the funds, which helped trigger the credit crisis last year and led Bear Stearns to agree in March to sell itself to JPMorgan & Chase Co.

Prosecutors will study the Barclays complaint, which claims Cioffi and Tannin engaged in "conscious deception of Barclays and others,'' according to a lawyer not involved in the case.

"I would expect prosecutors to pay close attention to those sets of allegations,'' former federal prosecutor Andrew Hruska said yesterday in a phone interview. "The facts underlying the civil lawsuit could be become direct evidence in their case in chief if they file criminal charges.''

Barclay's lost "almost all'' of a $400 million investment made after August 2006 in a fund known as Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd., referred to as the Enhanced Fund, according to the complaint.

Cioffi and Tannin convinced Barclays to become the sole shareholder after deceiving the bank about another fund, Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd., referred to as the High-Grade Fund, according to the complaint.

Both the Enhanced Fund and the High-Grade Fund once had $20 billion in assets, Barclays claimed. The two Bear Stearns funds failed when prices for collateralized-debt obligations linked to subprime mortgages plummeted as late payments among U.S. borrowers with poor credit histories or heavy debts increased.

Cioffi, 52, and Tannin, 46, wooed Barclays by touting the success of the High-Grade Fund, which began in March 2003 and had a 50 percent return by January 2007, according to the complaint.

Bear Stearns Asset Management, Cioffi and Tannin hid "problems and disarray'' in the High-Grade Fund including a failure to get approval from the board of directors for hundreds of self-dealing transactions, according to the complaint. Barclays also wasn't told that Bear Stearns had halted transactions with the High-Grade Fund, the bank said in its complaint.

In its complaint, Barclays accuses Bear Stearns Asset Management, Cioffi and Tannin of fraud, conspiracy and breach of fiduciary duties. Barclays seeks unspecified compensatory and punitive damages.

The case is Barclays Bank Plc v. Bear Stearns Asset Management, 07-cv-11400, U.S. District Court, Southern District of New York (Manhattan).

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