September 6, 2007
Bear Stearns Challenged by Investors in Collapsed Schemes
A group of investors that lost hundreds of millions of dollars when two Bear Stearns hedge funds collapsed last month is trying to sideline the investment bank so that it can conduct an independent investigation.
The group, made up of institutional and private investors who collectively held more than 25 per cent of the two funds, has asked a US court to appoint FTI Consulting, a forensic accountant, as the funds’ new general partner.
If successful, the request, which must be passed by a shareholder vote, would mean that Bear Stearns, whose asset management unit is the funds’ existing general partner, would have much weaker powers over the future of the two failed vehicles.
The position of general partner, an important role traditionally given to the firm that manages a fund, comes with significant decision-making rights in insolvency.
However, the two funds, which once controlled assets of about $10 billion (£4.9 billion), have been declared bankrupt and investors believe that there is virtually nothing left to be recovered in liquidation.
Lance Gotthoffer, a lawyer with Reed Smith representing the group of investors, said: “These funds are dead. Their only value now is for scientific research into what killed them. This group of investors has decided it doesn’t want an entity that was involved in killing the funds handling this research.”
Mr Gotthoffer – who accused Bear Stearns of “Watergate-era stone-walling tactics” in its handling of the investors’ request – said: “Something seems to have gone very, very wrong here. These investors want to know what, why, how and who was responsible. They want to ensure there is no cover-up and that all the facts are brought to the table.”
As general partner, FTI would assume legal responsibility to act in the best interests of all investors, and not just the group that has nominated it. If the vote is passed, FTI would conduct a thorough investigation of the funds’ collapse aimed at identifying which individuals, or teams, were responsible. This would include scrutiny of Bear Stearns’ staff and external parties, including auditors.
If FTI’s financial investigators are able to apportion blame, it would report its findings to the investors. As general partner with an overall responsibility to all investors, FTI would also advise on possible litigation and may initiate lawsuits on their behalf. If relevant, FTI would also pass its findings to the US Securities and Exchange Commission, the regulator.
The investor group, whose members have not been disclosed, must win the support of a simple majority of investors. A vote is expected within 60 days.
The request to oust Bear Stearns became possible after the investment bank failed to have the funds declared bankrupt in the Cayman Islands, where they are incorporated. Bear Stearns declined to comment.
external parties? May we assume this includes servicers?