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Bear Stearns faces amended lawsuit in collapse of Cayman Funds

Posted: 07 July 2008

Two of Bear Stearns former managers and auditor Deloitte & Touche are accused in an amended lawsuit seeking $1.5 billion in damages of engaging in fraud before the collapse of two hedge funds.

Two investors and the liquidators of two Cayman Islands funds filed an amended complaint that broadened the scope of a previous lawsuit seeking $1 billion in damages. The defendants include Ralph Cioffi, 52, and Matthew Tannin, 46, who were indicted June 19 and accused of misleading investors about the hedge funds, which invested in subprime mortgages.

The amended complaint, filed June 30, adds elements of the indictment, including e-mails in which Cioffi and Tannin discuss the declining financial position of the funds before they imploded. The collapse of the funds helped trigger the credit market crisis last year and led to the acquisition of Bear Stearns by JPMorgan.

"The funds were doomed to fail, because the Bear Stearns defendants conceived, managed, and deceptively marketed them knowing that they would be viable so long as - but only so long as - the U.S. housing market continued to experience an unprecedented rise," according to the amended complaint filed n federal court in Manhattan.

The complaint was filed by two investors, Stillwater Capital Partners LP of New York and Essex Fund Ltd. of the Cayman Islands, and by Geoffrey Varga and William Cleghorn, two liquidators appointed in the Caymans to recover losses for investors in "feeder funds."

Those funds channeled money into the two funds that imploded and filed for bankruptcy in July 2007. Cioffi and Tannin, who deny wrongdoing, were the first defendants charged over last year's mortgage-market breakdown.

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