HEDGE FUND NEWS

Bloomberg - Bear Stearns Cos. didn’t investigate the financial health of a hedge-fund client that later collapsed because its claim of an annual 20 percent return on investment “made perfect sense,” a former executive at the firm said.

Bear Stearns was sued in 2001 by a bankruptcy trustee on behalf of creditors of the now-defunct Manhattan Investment Fund Ltd. U.S. Trustee Helen Gredd alleged New York-based Bear Stearns was liable in part for $400 million in investor losses because it didn’t properly inspect the fund’s books, according to a complaint originally filed in a Manhattan bankruptcy court.

A senior Bear Stearns executive learned in 1998 that the fund was claiming a 20 percent return when the securities firm’s records showed a $190 million loss, the trustee said in court papers. The executive, Fred Schilling, was head of prime brokerage sales in 1998 when an investor in the hedge fund praised its returns to him at a cocktail party, he said.

“With the information I had, that Ernst & Young was a third-party administrator, and there were other prime brokers involved, it made perfect sense,” Schilling, referring to the New York-based auditor, testified today during a trial of the case in Manhattan federal court. The executive said he learned an affiliate of the accounting firm aggregated losses and gains from other parties to arrive at the final return rate.

Under U.S. bankruptcy law, if Gredd can prove the securities firm failed to diligently investigate the fund, she can recover around $141 million on behalf of creditors.

Bear Stearns spokeswoman Elizabeth Ventura declined to comment.

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