Rebel investors have seized two failed Bear Stearns hedge funds in a move their lawyers hope will give them a platform to sue the US bank for compensation.
A Cayman Islands court ejected liquidators appointed at the behest of Bear to run offshore feeder versions of Bear Stearns High-Grade Structured Credit and Enhanced Leverage funds, replacing them with investor-supported liquidators.
The move prepares the ground for the investors to try to win back some of the $1.6bn lost in the collapse of onshore and offshore Bear funds last July, the first high-profile victims of the subprime crisis.
James McCarroll, who represents the investors, said it was "the first major step, by any party, toward securing recovery of the more than $1bn lost by overseas institutional investors in these funds". Mr McCarroll is co-head of the alternative investment dispute resolution group at New York law firm Reed Smith.
Seizure of the funds is important because hedge fund investors are unwilling to have their names made public through a court hearing. By using the feeder funds a case can be made without naming them.
The feeder funds have only a few hundred thousand dollars left and are almost certain to support litigation by raising loans backed by potential proceeds of lawsuits.
The judge said there was a possible conflict in that KPMG, chosen as liquidator by the fund directors at the "instigation" of Bear, was also liquidator of the master fund into which the feeders invested. He went out of his way to say there was no blame attached to KPMG.
"Allegations to be investigated . . . include that [Bear] generated and relied upon erroneous net asset value calculations and that [Bear] 'warehoused' or 'dumped' unrealisable . . . subprime debt in the feeder funds in contravention of the offering memorandum," he said.
It was "understandable" that the investors would want investigations carried out "in an entirely independent, impartial and unfettered manner", the judge said.
Bear is also being sued by Barclays over loans the British bank made and faces probes by regulators and criminal authorities.
The judge ruled that Bear should bear a share of costs because it was "perfectly clear" that the bank was behind the decision to put the funds into liquidation ahead of a petition by investors to take control by electing their own directors.
Two partners from the Cayman office of London-based Kinetic Partners will act as liquidators.
Bear declined to comment.