Bear hedge fund sank as Merrill protected clients
NEW YORK (Reuters) - A late June move by Merrill Lynch & Co. Inc. MER.N to protect its clients from a struggling hedge fund run by Bear Stearns Cos. Inc. BSC.N helped hasten the fund's ultimate collapse, court papers show.
Recently filed court documents in U.S. Bankruptcy Court in Manhattan reveal more details about the events that led to the collapse of two hedge funds run by Bear Stearns.
For example, the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund started performing poorly in early 2007, court papers show.
By late May, the enhanced fund had begun to suffer significant devaluation of its asset portfolio, resulting in a number of margin calls.
About June 20, Merrill Lynch issued a bid list to some of its clients and then sold off some of the assets that were in the enhanced fund, court papers show.
"This resulted in further downward pressure on the relevant asset classes and a revaluation of Enhanced Fund's assets," according to a filing by lawyers representing liquidators assigned to the case.
Merrill Lynch was not immediately available to comment on the filing.
Nearly all secured counterparties have now seized and sold off assets in the fund that has been subject to repurchase agreements. In some cases, this has resulted in a positive asset or cash return to the hedge fund.
It also has resulted in shortfalls in which the investors can bring claims against the fund, according to court filings.
The enhanced fund has one sole investor, but the fund's board of directors in late July blocked a redemption request.
On July 30, the board passed a resolution authorizing the fund to file a petition seeking to unwind its assets under the provision of Cayman Islands law, court papers show.
Meanwhile, the enhanced fund and one with less leverage, recently received temporary protection from creditors and lawsuits in U.S. courts, a bankruptcy judge in Manhattan has ruled.
The two Bear hedge funds, whose demise embarrassed the investment bank, filed for bankruptcy protection on July 31 in U.S. Bankruptcy Court in Manhattan. The funds also are subject to liquidation in the Grand Court of the Cayman Islands, court papers show.
U.S. Bankruptcy Judge Burton Lifland in Manhattan recently blocked all lawsuits against the two failed hedge funds until August 9, according to a recent order.
Liquidators from the Cayman Islands, where the two hedge funds are registered, are trying to protect and preserve assets.
