UPDATE 1-Bank of America sues ex-Bear Stearns managers
(Adds details from the complaint, paragraphs 4-6)
By Grant McCool
NEW YORK, Oct 29 (Reuters) - Bank of America Corp (BAC.N) sued Bear Stearns and two former hedge fund managers on Wednesday who were indicted in the first major federal case stemming from the subprime mortgage crisis.
The lawsuit in U.S. District Court in Manhattan accused Bear Stearns, which was sold in March to JPMorgan Chase & Co (JPM.N), and three of its officers of "egregious misconduct" in a $4 billion transaction structured and marketed by Bank of America and other financing transactions in 2007.
It named Ralph Cioffi and Matthew Tannin, the former managers, who were charged June 19 with conspiracy and securities fraud related to the demise of their two funds that cost investors more than $1 billion. The pair were also charged by the U.S. Securities and Exchange Commission.
The Bank of America litigation accused the firm and three executives of breach of contract, fraud and misleading the bank.
The other officer identified as a defendant is Raymond McGarrigal, who was a senior managing director at Bear Stearns and a senior portfolio manager for the two hedge funds.
A representative for Tannin declined comment on the lawsuit. Representatives for the other defendants could not immediately be reached for comment.
In May 2007, Bank of America, at the request of Bear Stearns Asset Management, structured and marketed a $4 billion transaction known as a "CDO-squared", the suit said. A CDO is a collateralized debt obligation, and the transaction involved mortgage-backed assets pooled and structured to support the sale of certain securities.
Over several months Bear Stearns and its employees, including the three named in the complaint, concealed substantial withdrawal requests from the two funds managed by the executives, the lawsuit said.
Other changes in the business, properties, financial condition and prospects of Bear Stearns asset management were not disclosed, the bank said.
"The eventual collapse of the funds in June 2007 -- an event that contributed to the ultimate demise of Bear Stearns, predictably caused an enormous decline in the value of both the assets underlying the CDO-squared transaction and the securities issued in the transaction," the lawsuit said.
"As a direct and foreseeable consequence of defendants' misconduct, the bank sustained significant losses."
In indictments unsealed in U.S. District Court in Brooklyn in June, Cioffi and Tannin were accused of touting their funds' prospects to investors as an "awesome opportunity," while simultaneously expressing private concern about an impending subprime mortgage meltdown. (Reporting by Grant McCool, editing by Leslie Gevirtz)
