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Cayman Islands hedge funds lose bid to protect assets

Posted: 29 May 2008

Bear Stearns ‘bankrupt' hedge funds are unable to shield their US assets from lawsuits while they liquidate in the Cayman Islands, a federal judge has ruled - upholding a bankruptcy court decision.

Judge Robert Sweet in Manhattan ruled on Tuesday that the lower court correctly denied protection from creditors under Chapter 15 of the US Bankruptcy Code because the Cayman Islands were not their "center of main interest". The funds are slowly being collapsed under the supervision of liquidators in Cayman where the Bear Stearns units are based.

"The process by which the financial problems of insolvent hedge funds are resolved appears to be of transcendent importance to the investment community and perhaps even to the society at large," Judge Sweet stated in an order.
The decision may be used as precedent in future rulings on whether US hedge funds based off-shore and have operations onshore, can claim similar protections.

It was ruled that company must have a "center of main interest" outside the US to qualify for protection. Alternately, a fund can have a "nonmain" center of interest, or one that has substantial, though not primary, operations. Lawyers for New York-based Bear Stearns, which is being acquired by JPMorgan Chase & Co., argued that the funds had assets and two directors in the Cayman Islands requiring them to come under Cayman law.

The bankruptcy court found that Bear Stearns Asset Management is located in New York, as is its administrator, which runs its own back-office operations. All of the funds' assets were also in New York prior to a transfer made after its bankruptcy filing.

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