Bank Of America Sues Bear, Ex-Managers Over Collapsed Funds

Oct 30 2008 | 10:49am ET

Bank of America Corp. has sued Bear Stearns and two former Bear hedge fund managers, alleging that they lied about two funds on the brink of collapse.

The lawsuit, filed in Manhattan federal court against Bear Stearns Asset Management and former managers Ralph Cioffi and Matthew Tannin, claims “egregious conduct” related to a CDO-squared transaction. Cioffi and Tannin have been indicted on criminal fraud charges in the collapse last summer of the Bear Stearns High-Grade Structured Credit Fund and a more highly-levered sister fund, as well as a civil action filed by the Securities and Exchange Commission.

According to BofA, mortgage-backed securities owned by the Bear hedge funds were used to back a CDO-squared issue, while Bear, Cioffi and Tannin hid the funds’ losses. The lawsuit accuses the defendants of being “desperate to secure liquidity to prop up the failing hedge funds.” They “misled the bank into structuring, marketing and closing the CDO-squared transaction,” and then made things worse by securing an addition $1 billion from BofA.

“When the hedge funds were unable to meet their obligations to repay the bank for short-term financing, the bank suffered significant additional losses,” the lawsuit alleges. BofA is seeking more than $2 billion.

In addition to BSAM, Cioffi and Tannin, the lawsuit named Raymond McGarrigal, senior managing director at BSAM, but not JPMorgan Chase, which bought Bear Stearns after its collapse this summer.

Cioffi and co-fund manager Matthew Tannin face conspiracy and securities fraud charges due to the collapse of the funds, which cost investors $1.5 billion. Cioffi faces 40 years in prison and Tannin faces 20 years; Tannin’s attorney has said the men are being made scapegoats for the credit crisis.

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