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Bear Stearns Caymans Filing May Hurt Funds' Creditors (Update2)
By Jeff St.Onge and Bill Rochelle

Aug. 7 (Bloomberg) -- Bear Stearns Cos.' decision to liquidate two bankrupt hedge funds in the Cayman Islands instead of New York may limit creditors' and investors' ability to get their money back.

While most of their assets are in New York, the funds filed for bankruptcy protection July 31 in a court in the Caymans, where they are incorporated. The bank also used a 2005 bankruptcy law to ask a U.S. judge in Manhattan to block all lawsuits against the funds and protect their U.S. assets during the Caymans proceedings.

The Bear Stearns cases may establish a precedent that would let other failed hedge funds liquidate in the Caymans, where judges have a track record of favoring management. The local monetary authority estimates that three out of four hedge funds globally are incorporated in the islands.

``This is definitely going to be closely watched,'' said Evan Flaschen, a lawyer with Bracewell & Giuliani in New York, who has represented companies and creditors in international bankruptcy cases. ``Other hedge funds might do the same thing.''

The funds, which invested in securities tied to home mortgages, collapsed amid rising defaults on subprime loans, made to people with weak credit. Bear Stearns, the fifth-largest U.S. investment firm by market value, on Aug. 5 ousted Co-President Warren Spector, who headed the mortgage and fixed-income business.

Shares History

Bear Stearns shares rose $1.19 or 1% to $115.00 at 10:32 a.m. in New York Stock Exchange composite trading. Yesterday they fell to their lowest level since 2005 before rallying on speculation the government may limit losses in mortgage lending.

Creditors and investors in the two funds are likely to get back ``a pittance on the dollar'' and will attack Bear Stearns's bankruptcy tactics in court, said Bill Brandt, president of Chicago-based Development Specialists Inc. His firm advises hedge fund Ritchie Capital Management Ltd. in the bankruptcies of its two life insurance funds in New York.

Bear Stearns hasn't said how much the two funds owe creditors.

Hedge funds are lightly regulated, high-risk investment pools favored by institutional investors and wealthy individuals.

Filing the funds' bankruptcy in the Caymans ``is a nice little stunt, and it may work for a while,'' Brandt said. ``Bear Stearns is trying to put a wall between themselves and these so- called rogue funds.''

`Attractive to Management'

The Caymans courts make it ``difficult to take legal action there'' and are ``much less transparent than American courts,'' said Jay Westbrook, a professor at University of Texas Law School in Austin who helped author the 2005 law. The British- administered islands are ``attractive to management,'' he said.

Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd. and Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd. asked for an ``orderly liquidation'' in a petition filed in Cayman Islands Grand Court, citing volatility in the subprime mortgage market.

Chapter 15 of the U.S. bankruptcy code, a new international law passed by Congress in 2005, lets U.S. bankruptcy judges assist courts in other countries with liquidations. The measure shields the company in bankruptcy and its assets in the U.S. from lawsuits and other collection attempts. Distributions to creditors are handled by the foreign court.

Not Tested

Creditors may argue that the main case should proceed in the U.S. To do so they must show the U.S. bankruptcy judge that the hedge funds had their ``center of main interests'' in the U.S, said Robin Phelan, of Haynes & Boone, who represented hedge fund InverWorld Inc. in its 1999 liquidation in the Caymans.

Because the two hedge funds were incorporated in the Cayman Islands, that's presumed to be the center of main interests, according to Phelan.

``That's going to be an issue,'' he said, noting that the new bankruptcy law ``hasn't really been tested.''

The Caymans ``ought to be irrelevant'' because the funds' assets are in the U.S., according to their bankruptcy filings, Westbrook said. ``If a company is basically managed out of New York, then the case should be in New York,'' he said.

``This was a properly commenced Cayman Islands proceeding, commenced in accordance with the governing provisions of the funds and with Cayman law,'' said Fred Hodara, a lawyer for the bankrupt funds with Akin Gump Strauss Hauer & Feld in New York, ``These are Caymans-formed entities.''

Knows Issue

Russell Sherman, a Bear Stearns spokesman, didn't return a message left with an assistant or a voice-mail message.

In the U.S., the Bear Stearns hedge-fund cases were assigned to Burton Lifland, the most senior bankruptcy judge in New York. Lifland scheduled a hearing for Aug. 9 on the funds' request for an order blocking legal actions against the U.S. assets.

Lifland ``is as familiar with these types of issues as anyone,'' Flaschen said. ``He focuses on the equities of the situation -- what's fair and practical.''

The Chapter 15 cases are Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd., 07-12383, and Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd., 07-12384, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Jeff St.Onge in Washington jstonge@bloomberg.net ; Bill Rochelle in New York at wrochelle@bloomberg.net .

Last Updated: August 7, 2007 10:37 EDT
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Angry Hedge Fund

Bear Stearns risks anger over hedge funds collapse
Bank will liquidate two bankrupt hedge funds in Cayman islands, where investors have fewer rights

Michael Herman and Agencies in NY

Bear Stearns’ decision to liquidate two bankrupt hedge funds in the Cayman Islands — where disgruntled investors have weaker rights — could backfire, according to industry experts in New York.

The move — formalised with a bankruptcy filing on July 31 — could establish a precedent that will allow other failed hedge funds to seek bankruptcy refuge in the Cayman Islands, where judges are known for favouring managers over investors, Bloomberg reports.

“This is definitely going to be watched closely and other hedge funds might do the same thing,” Evan Flaschen, a bankruptcy lawyer at Bracewell & Giuliani in New York, told Bloomberg.

Investors in the two funds, which were heavily invested in sub-prime mortgages and collapsed on the back of rising defaults on home loans, are unlikely to take the news lying down.

Related Links
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Bear Stearns ousts chief in bond shake-up
Prime lender joins victims of US mortgage meltdown
Bill Brandt, the president of Development Specialists, a financial services consultancy, branded Bear’s move a “nice little stunt” and accused the bank of “trying to put a wall between themselves and the funds".

Mr Brandt told Bloomberg that he expected investors to attack Bear Stearns over the decision.

Jay Westbrook, a professor at the University of Texas Law School, said that it was “difficult to take legal action [in the Cayman Islands] and that as a jurisdiction it was “attractive to management.”

However Mark Andrews, a bankruptcy lawyer at Denton Wilde Sapte in London, defended the move.

“These are Cayman incorporated funds and so the Cayman Islands are the obvious place to file for bankruptcy, “ Mr Andrews said, adding that this was “not a stunt but a perfectly legitimate business decision.”

Another UK bankruptcy lawyer, who declined to be named, said: “Where a fund is incorporated and under which system it will be administered if things go bad is one of the most basic questions you ask before throwing your money in. It sounds like a desperate attempt.”

Bear Stearns could not be reached for comment. The bank declined to comment to Bloomberg.
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PIRATES OF THE CARIBBEAN

http://johngaltfla.com/blog2/2007/08/08/the-black-pearl-is-sinking/

http://www.financialsense.com/fsu/editorials/kirby/2005/0318.html
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Why the Caymans?
http://www.caymannetnews.com/news-1384--1-1--.html

Cayman Islands in the Foreign Press
Published on Tuesday, August 21, 2007 

Collateralized debt companies usually incorporated in the Cayman Islands

NEW YORK, USA: Bloomberg News, August 20, 2007 – Each time a bank or financial firm creates a collateralized debt obligation (CDO), it forms a free-standing company incorporated offshore, usually in the Cayman Islands, which doesn’t tax corporations. All CDOs have a trustee, usually a bank, that prepares monthly reports on the changing contents of the debt package.

The trail that connects subprime debt to money market funds usually starts with a mortgage broker who makes a loan to a homebuyer with poor credit. A middleman then bundles hundreds of these subprime mortgages into so-called asset-backed securities.

Next, a CDO manager buys hundreds of these securities for collateral for a CDO. Some CDOs issue commercial paper, and brokers can then sell that paper to money market funds. Commercial paper, which is typically issued by banks and large companies, is debt maturing in less than 270 days.

Commercial paper pays relatively low interest rates, which averaged about 5.3 percent in June and July, because it rarely defaults. There have been occasional exceptions, such as paper issued by Enron Corp. and WorldCom Inc., both of which filed for bankruptcy earlier in this decade.




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Why does a borrower fighting a servicer care? Please explain why this matters. 
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Well, gee....don't see where there is a whole lot to explain here.  Using YOUR mortgage for money laundering, investment fraud and tax evasion, not to mention consumer fraud on YOU......stealing your home, seems real simple to me.

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GuessWhoGetsTheShaft?
Borrower
 
Lender
 
Service
 
Pooling
 
Hedge funds
 
Stock holder
 
Insurance company's
 
Credit rating agency's
 
Wall Street
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