Investor says he was misled by Bear Stearns fund

NEW YORK, April 25 Fri Apr 25, 2008 4:25pm EDT

NEW YORK, April 25 (Reuters) - Bear Stearns Co Inc BSC.N has been hit with an arbitration claim from an investor who says he was duped into increasing his stake in a hedge fund tied to mortgage securities just before the fund halted redemptions last year.

The claim comes as the investment bank faces a slew of lawsuits and arbitration claims from unhappy investors. Hit by wrong-way bets on mortgage markets, Bear Stearns is set to be bought by JPMorgan Chase & Co (JPM.N), which will inherit its legal problems.

Laurence Stone, of Villanova, Pennsylvania, contends in arbitration papers he was "fraudulently induced and misled" into investing $9 million in the Bear Stearns Asset Backed Securities Partners LP fund. The fund halted redemptions last July after jittery investors wanted to yank their money.

Stone, 43, is seeking about $7.6 million in losses and damages, according to the claim, filed with the Financial Industry Regulatory Authority on April 18. He says his investment represented the proceeds from the sale of his merchant payment company and that he had sought to have the money invested conservatively.

Stone initially invested $5 million. When he grew concerned about the health of the mortgage industry, he spoke by telephone in April 2007 with the fund's senior manager, Colin Gordon, who according to the arbitration papers told Stone the correction in the mortgage markets had fully "run its course."

Stone then invested $4 million more in the fund, he said. Soon after, the fund announced it was stopping redemptions. At the time, the fund's assets were estimated at $850 million.

Stone, in a telephone interview with Reuters on Friday, said he had "never felt so violated in my life" about having such sudden, negative returns in a fund.

"One, they misrepresented to me the nature of the fund and the real risk involved, and two, they are basically hiding all pricing information" about the fund's holdings, Stone said.

Bear Stearns spokesman Russell Sherman was not immediately available for comment. A message left on Gordon's office voice mail was not immediately returned.

Stone's claims were filed by law firms Rich & Intelisano LLP and Zamansky & Associates LLC in New York.

The hedge fund held assets tied to mortgages made to prime borrowers, as well as people with decent credit records, but who are unable or unwilling to document their income, known as "Alt-A" borrowers.

Bear has had problems with other hedge funds. Last year, the company said its High-Grade Structured Credit Strategies Fund and High-Grade Structured Credit Strategies Enhanced Leverage Fund, had very little value. Several arbitration claims already have been brought related to those two funds, which invested in bonds linked to subprime mortgages.

Ross Intelisano, one of Stone's attorneys, said on Friday that his firm had also brought a new arbitration claim against Bear on behalf of investors who lost about $45 million in the collapse of the two subprime-linked funds. He said the latest claim, filed earlier this month, was believed to be the biggest to date related to the collapse of the two funds. (Editing by Andre Grenon)

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