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Will plantiffs and prosecutors EVER get that Mortgage Servicing Fraud Is KEY to those 35-100x levered up rigged bets that BSAM hedge funds were making ? . . . . same short bets that HF's and IB's continue to make, a sure thing as long as subsidiary servicers continue to manufacture defaults.  

Bear Stearns Faces Revised Suit Over Collapse of Hedge Funds
Bloomberg

By David Voreacos and Tiffany Kary

July 4 (Bloomberg) -- Bear Stearns Cos., two of its former managers, and auditor Deloitte & Touche are accused in an amended lawsuit seeking $1.5 billion in damages of engaging in fraud before the collapse of two hedge funds.

Two investors and the liquidators of two Cayman Islands funds filed an amended complaint that broadened the scope of an April 4 suit seeking $1 billion in damages. The defendants include Ralph Cioffi, 52, and Matthew Tannin, 46, who were indicted June 19 and accused of misleading investors about the hedge funds, which invested in subprime mortgages.

The amended complaint, filed June 30, adds elements of the indictment, including e-mails in which Cioffi and Tannin discuss the declining financial position of the funds before they imploded in July 2007. The collapse of the funds helped trigger the credit market crisis last year and led to the acquisition of Bear Stearns in May by New York-based JPMorgan & Chase Co.

``The funds were doomed to fail, because the Bear Stearns defendants conceived, managed, and deceptively marketed them knowing that they would be viable so long as -- but only so long as -- the U.S. housing market continued to experience an unprecedented rise,'' according to the amended complaint filed n federal court in Manhattan.

The complaint was filed by two investors, Stillwater Capital Partners LP of New York and Essex Fund Ltd. of the Cayman Islands, and by Geoffrey Varga and William Cleghorn, two liquidators appointed in the Caymans to recover losses for investors in ``feeder funds.''

Those funds channeled money into the two funds that imploded and filed for bankruptcy in July 2007. Cioffi and Tannin, who deny wrongdoing, were the first defendants charged over last year's mortgage-market breakdown.

Flawed Model

Cioffi attorney Edward Little didn't return a call seeking comment. The office of Tannin attorney Susan Brune referred a call to spokesman Andy Merrill, who didn't return a call seeking comment. Brian Marchiony, a spokesman for JPMorgan, didn't return a call seeking comment.

A spokeswoman for Deloitte, Deborah Harrington, said in an e-mailed statement that the amended complaint ``is totally without merit'' and the firm will defend it ``vigorously.''

Deloitte certified a flawed model used by Bear Stearns to value assets in the funds' portfolio and issued clean audit opinions about the funds, according to the complaint.

Deloitte ``played a direct role'' in the Bear Stearns scheme by ``defrauding investors and aiding and abetting the Bear Stearns defendants in the financial and reporting improprieties related to the funds,'' according to the complaint.

`Willfully Disregarded'

Bear Stearns was one of Deloitte's ``largest and most significant clients,'' paying more than $20 million in fees last year, including $1 million to audit the collapsed hedge funds, according to the complaint.

The complaint also names as co-defendants a Cayman-based firm that provided legal services, Walker Financial Services Ltd., and two of its senior vice presidents, Scott Lennon and Michele Wilson-Clarke. It alleged they ``willfully disregarded their duties to provide independent review and approval of the vast majority of insider transactions executed by the funds.''

Lennon didn't immediately return a call for comment. A message left at the firm wasn't returned. Wilson-Clarke couldn't immediately be reached for comment.

The two hedge funds filed to liquidate in the Caymans at the same time as they sought U.S. bankruptcy protection. They were denied U.S. bankruptcy protection.

The case is Varga v. The Bear Stearns Cos., 08-3397, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: David Voreacos in Newark, New Jersey at dvoreacos@bloomberg.net; Tiffany Kary in New York bankruptcy court at tkary@bloomberg.net.

Last Updated: July 4, 2008 00:01 EDT
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