Wednesday, 25 May 2016
Last updated 16 min ago
Feb 15 2007 | 12:02pm ET
In a decision that could send shockwaves through the prime brokerage industry, a federal judge has ordered Bear Stearns to pony up $125.1 million to a failed hedge fund’s clients. Last month, the judge found that Bear had failed to adequately investigate what later turned out to be fraud on the part of its client, Manhattan Investment Fund, whose manager allegedly bilked clients out of some $400 million.
Instead, Judge Burton Lifland said last month, Bear, one of Wall Street’s largest prime brokers, was trying to limit its own losses. “Bear Stearns failed to act diligently in a timely manner,” Lifland said in a Jan. 9 opinion, noting that when Bear finally did take a look at Manhattan’s financial statements a year later, it took “a 10-minute review” to determine that manager Michael Berger had been lying to them.
“Bear Stearns was required to do more than simply ask the wrongdoer if he was doing wrong,” Lifland ruled. “Diligence requires consulting easily obtainable sources of information that would bear on the truth.”
Berger’s malfeasance came to light after it collapsed in 2000 and the Securities and Exchange Commission sued it for fraud. At the time, the SEC called the Manhattan case “one of the most egregious and costly frauds in the history of the securities market.” Since then, Bear has been battling the trustee seeking to recoup investor money. According to Lifland, Bear should have known about the fraud as early as December 1998.
The decision could have big implications for prime broking, for, as Bloomberg News reports, Bear’s brokerage agreement with Manhattan was standard for the industry.
Things could be worse for Bear: The firm had faced returning up to $180 million.