Mass. Sues Bear Over Collapsed Hedge Funds

Nov 15 2007 | 7:37am ET

William Galvin, the Massachusetts secretary of the commonwealth and bête noire of the hedge fund industry, has Bear Stearns in his sights.

Galvin sued Bear Stearns Asset Management yesterday, alleging that it failed to notify investors and independent directors of two collapsed hedge funds about conflicts of interest. The complaint accuses the firm of trading securities from its own accounts with the High-Grade Structured Credit Strategies and High-Grade Structured Credit Strategies Enhanced Leverage funds without letting clients know in writing and receiving their consent.

“Investors who sought to take advantage of the inimitable risk management reputation of Bear Stearns found themselves in a highly-complex hedge fund investment program that relied on overworked junior personnel to manage a conflict reporting process required by federal law,” the complaint says.

In addition, Galvin said that a former director of the funds failed to respond to subpoenas he issued.

“Investors are entitled to know when their investment adviser has some stake in the other side of the deal,” he said in a statement. “The cavalier attitude that this company had about its various conflicts of interests in intolerable.”

Galvin is seeking unspecified damages.

The High-Grade Structured Credit funds collapsed this summer, victims of the subprime slide. Both invested in mortgage-backed securities.

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