Bloomberg – Bear Stearns Cos. may be ordered today to pay a failed hedge fund as much as $180 million in a court ruling that will help determine how aggressively Wall Street firms police their mostlucrative trading clients.
Burton Lifland, the U.S. judge overseeing the bankruptcy of Manhattan Investment Fund Ltd., will decide whether Bear Stearns must return the money it took as the fund slid toward insolvency. Lifland concluded last month that Bear Stearns, one of the biggest brokers to hedge funds, was trying to cover its own potential losses and didn’t investigate thoroughly after learning of possible fraud at Manhattan Investment, court filings show.
“Bear Stearns failed to act diligently in a timely manner,” Lifland said in a Jan. 9 opinion, finding that the New York-based company, the fifth-largest U.S. securities firm, learned as early as December 1998 that fund manager Michael Berger may have been deceiving investors about returns. A hearing in the case is scheduled for today in Manhattan.
A ruling against Bear Stearns would add to the pressure on securities firms to monitor hedge funds, which pay Wall Street about $10 billion annually in fees for prime-brokerage services. Federal regulators are probing whether the securities industry sets strict enough limits when lending to hedge funds, and the U.S. Securities and Exchange Commission has said prime brokers should be a “window” into their dealings.
“This is going to send shock waves through many prime brokers, because they’ve been very careful to limit their responsibility for their customers’ actions,” said Michael Missal, a former SEC lawyer and head of the regulatory practice at Kirkpatrick & Lockhart Preston Gates Ellis LLP in Washington. “They do not want to be seen as insurers for their clients.”
