NEW YORK (Reuters) - Some aggrieved investors are turning to lawyers to pursue possible legal claims stemming from losses at two Bear Stearns Cos. BSC.N hedge funds that were virtually wiped out from large, illiquid bets on risky mortgages.
One lawyer who handles cases against financial firms said on Wednesday that he had been retained by two investors in the funds — a family office and a fund of funds he would not identify — to explore potential lawsuits.
“They are shocked and angered by the losses,” said lawyer Ross Intelisano, of Rich & Intelisano in New York. “They were under the impression that at least for that fund (that they were invested in) that the losses were much milder.”
Bear Stearns said in a letter to clients on Tuesday that there was “effectively no value” left for investors in its High-Grade Structured Credit Strategies Enhanced Leverage Fund and “very little value” remaining in the High-Grade Structured Credit Strategies Fund. A copy of the letter was obtained by Reuters.
CNBC reported on Wednesday that Bear Stearns had hired several outside law firms as it braces for investor litigation. It said the Wall Street firm had hired WilmerHale to represent it before the U.S. Securities and Exchange Commission and shareholders, another to represent the board of directors and audit committee and another to represent the funds themselves.
Bear Stearns did not respond to requests for comment on potential litigation or its legal strategy.
Intelisano, who said he still needed to review the funds’ offering documents before deciding to bring any legal action, said his clients had both invested in the High-Grade Structured Credit Strategies Fund. The family office — a private entity that oversees investments for a wealthy family — had about $1 million invested, while the fund of funds had more than $10 million in the fund, he said.
The Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage fund reported $638 million of investor capital and gross long positions of $11.15 billion in the first quarter.
The Bear Stearns High-Grade Structured Credit Strategies fund had $925 million of investor capital and gross long positions of $9.682 billion through March 31.
Bear Stearns was forced last month to bail out that fund with $1.6 billion, reduced from $3.2 billion initially, to prevent a fire sale of those assets.
Currently, about $1.4 billion remains outstanding on this credit line, Bear said in the letter.
Legal experts say the losses in the Bear funds are so large that it’s almost certain litigation will result.
But they say plaintiffs could have a tough time proving their case. Because the funds were aimed at sophisticated investors such as institutions and wealthy clients, it could be hard to argue that the risks were not properly defined.
Another lawyer who specializes in securities lawsuits, Jacob Zamansky of Zamansky & Associates, said on Wednesday that he too had been contacted by several investors in the funds — primarily wealthy individuals. He said he was investigating potential claims, including allegations that Bear Stearns vastly understated the total subprime exposure of the funds.
A major issue is where potential claims would be brought. If the hedge funds themselves are sued, that likely would happen in federal court, Intelisano said.
But if Bear Stearns itself is the defendant, cases could end up in arbitration, he said.
“Where to file and against what entities I think is a huge question,” he said. “It may be one of the reasons no one has done anything yet.”
Philippe Bonnefoy, chairman of hedge fund advisory group Cedard Partners, said that lawsuits are likely against defendants such as the funds’ administrators who were responsible for independent accounting, the prime brokers that helped finance the funds’ trades and the fund managers.
He said that the funds long had had steady returns and Bear had a good track record. They were attractive to institutional investors as well as funds of funds that took stakes in various hedge funds, making the losses all the more staggering.
“There is no reason for investors to believe they are at 100 one month and then be told they are at zero the next,” he said.
Additional reporting by Svea Herbst-Bayliss in Boston and Tim McLaughlin in New York