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ATURE

The heat is on

by Kris Devasabai 7 December 2007

The booming alternative investment business is driving major new competition between offshore jurisdictions. But the threat of external political interference remains a clear and present danger writes, KRIS DEVASABAI

With billions of dollars in assets under administration, offshore jurisdictions like the Cayman Islands, Bermuda and the Channel Islands of Jersey and Guernsey have become central pillars of the fast growing alternative funds business.

This is the result of much more than just the traditional tax considerations. The regulatory framework in the Cayman Islands, for instance, earned glowing praise from the IMF following a recent assessment, with officials noting the "extensive programme of legislative, rule and guideline development [that] has introduced an increasingly effective system of regulation" within the jurisdiction.

The sophistication of the regulatory environment is backed up by a concentration of expertise in fund structuring and servicing that plays a huge role in perpetuating the success of the offshore world.

Many of the established offshore jurisdictions are now more confident than ever about the strength of their position within the global financial services industry. Greg Wojciechowski, president and chief executive officer of the Bermuda Stock Exchange, for instance, is very bullish about business prospects in Bermuda. "We have been in the alternative funds space through domiciling and servicing for many years and longer than many of our competitors," he says.

"The Bermuda product and stamp and our innovative ‘Launch and List' facility are known and respected all over the world and all of the ancillary services that support the industry are well entrenched."

Exporting brands

Ambitions are running high among a number of other jurisdictions and, for some, the focus is now on exporting their own brand of offshore financial services to every corner of the globe.

In September a delegation representing the island of Jersey set off on a tour of the Far East with plans to hold a seminar in Shanghai to promote the benefits of doing business on the island, while the Cayman Islands recently introduced a company registration system that allows promoters to structure products in Arabic in a bid to attract Islamic finance business from the Middle East.

These efforts have been paying dividends, and Bhagesh Malde, head of JPMorgan Hedge Fund Services in EMEA and Asia Pacific, says Cayman is well established as a jurisdiction of choice among hedge fund managers in Asia and the Middle East.

"While Singapore and Hong Kong are important centres of hedge fund activity in Asia the vast majority funds managed here are domiciled in the traditional offshore jurisdictions - most notably the Cayman Islands," he says. "The same is true of funds managed out of the Middle East, although it will be interesting to see if the Dubai International Financial Centre, with its new legal framework, is able to attract business away from Cayman."

Emerging threats

Yet despite their success to date the offshore jurisdictions still face external pressures that could undermine their position in the global financial services machinery.

Last month, the UK government announced plans to impose a new tax on ‘non-domiciliaries' who currently fall outside the reach of the taxman. Alan Smith, chairman of the Isle of Man Fund Management Association, sees this as the opening salvo in a much wider push to undermine the offshore model.

"This is just the first step," he says. "The UK government is clearly looking to target offshore funds that are managed onshore, which means the days of setting up a shell company in the Caribbean and claiming that all the operations are carried out offshore are numbered."

There have been similar developments in the US, with presidential hopeful Barack Obama recently launching a withering attack on Bermuda and the offshore jurisdictions of the Caribbean.

The US Senator for Illinois - together with Senate colleagues Carl Levin and Norm Coleman - tabled the ‘Stop Tax Haven Abuse Act' in February citing the $100bn in revenue they claim is "drained from the US Treasury at the expense of honest, hardworking American families who pay their fair share."

And in September, US Senate Finance Committee Chairman Max Baucus took issue with the way managers running offshore hedge funds can defer their income for an indefinite period. "Tax deferred, in a certain sense, is tax not paid," said Baucus, though he stopped short of calling for legislative changes to deal with the issue.

While some in the offshore world brushed off these developments as old news, the industry as a whole sat up and took notice when Judge Burton Lifland, the most senior member of the United States Bankruptcy Court in Manhattan, denied a request from Bear Stearns for bankruptcy protection in the US as it sought to liquidate its two stricken hedge funds in the Cayman Islands.

Legal questions

In ruling that the Cayman Islands were not the proper place to liquidate the funds - and thus refusing them protection from lawsuits under US law - the judge took account of the fact that the funds had no employees or physical presence in Cayman.

"The only adhesive connection with the Cayman Islands that the funds have is the fact that they are registered there," he noted.

This is the second time that the US courts have refused bankruptcy protection for Cayman domiciled funds, with the Sphinx funds subject to a similar decision following the collapse of the Refco operation last year.

Smith says that these decisions, if established as precedent, could have serious consequences for Cayman's position in the hedge fund world.

"If this decision is upheld then Cayman's position as the jurisdiction of choice for the hedge fund industry is gone," he says.

Not everyone supports this view. Maples & Calder managing partner Gus Pope refutes the argument that the case specifically undermines the regime in Cayman. Instead, he sees the rationale adopted by Judge Lifland as having wider implications for the offshore world as a whole.

"The judgment is not Cayman specific at all - the judge made a decision on the facts as to the principal place of business of the Bear Stearns funds. The rationale behind the decision will apply equally to any offshore hedge fund irrespective of where it is domiciled," he explains.

Whatever its true long term implications, the decision by Judge Lifland has already got hedge fund managers asking some serious questions about where and how they structure their operations, while the issue of taxation is now becoming a real concern.

The response from the offshore jurisdictions themselves, on the other hand, has to date been somewhat mixed.

In Cayman the expectation is that the liquidators of the Bear Stearns funds will launch a vigorous appeal against the decision of Judge Lifland, while the rumblings in the US regarding the taxation of offshore assets are being watched carefully. But beyond that there are no plans to make any major changes to the funds regime on the island.

"The statistics year on year bear out the fact that Cayman is still in a big growth cycle, and there are no plans to change the fundamentals that underpin this success," says Pope.

Emulating success

Other jurisdictions are seeking to emulate that success by overhauling their own regulations with a view to replicating, or even surpassing, the flexibility and freedom granted to hedge funds in Cayman.

Just last month Jersey unveiled proposals for an ‘Unregulated Funds Regime' as part of its strategy for the future. The proposed regime will create a framework in Jersey that is even more relaxed than those found in Cayman or the British Virgin Islands.

A key change is that there will no longer be a requirement to seek prior regulatory approval before launching a fund in Jersey, while the only notable restrictions are that funds set up under the new rules must carry prominent investment warnings identifying them as unregulated products. There is no requirement for an audit and local directors, administrators or custodians are not needed under the proposed regime.

"The ‘Unregulated Funds Regime' gives fund promoters and managers a much greater degree of flexibility than was previously the case," says Natalie Sullivan, a partner in the Jersey office of Maples & Calder.

"Jersey now surpasses even Cayman in terms of flexibility in that the new rules create a truly unregulated regime that imposes no local requirements on the fund manager," she adds.

The ‘Unregulated Funds Regime' has attracted a lot of interest, and Jersey Finance technical director Robert Kirkby says the new rules will establish a platform for the island's continued growth as an offshore jurisdiction.

"What we have set out to do is create a regime that will appeal to the funds industry both today and in the future. In that sense we wanted to have rules that were not restrictive. When a new fund type comes around the corner we want Jersey to be in a position to serve as the domicile for the product," he explains.

But questions have been raised about whether this is the right route to take in light of recent developments. Smith, for one, is critical of the approach being taken by Jersey.

"I think they are going the wrong way," he says. "The increasing influence of institutional investors and the moves by onshore regulators are forcing the hedge fund industry to seek out jurisdictions that offer more transparency and regulation. In that context promoting Jersey as an unregulated jurisdiction is a bad move."

Earlier this year the Isle of Man itself launched a new funds regime as part of its drive to attract greater levels of hedge fund business - though the island is taking a different approach from its competitors.

Smith says the current Manx doctrine is geared towards positioning the Isle of Man as not only a domicile for the hedge fund industry, but also as a location for the establishment of elements of the front and middle office operations of asset managers.

He explains that the strategy is a response to the fact that recent developments - most notably in relation to the tax situation and the extra-territoriality that the US courts have sought to apply to the Bear Stearns funds - will force the industry to think differently about what it means to be offshore.

"Hedge fund managers are now looking seriously at staffing their management companies and establishing a physical presence offshore. The Isle of Man is positioning itself as a location where they can do just that," he says.

Onshore challenge

While it remains to be seen whether the moves by Jersey and the Isle of Man will prove successful, it is becoming increasingly apparent that these offshore jurisdictions will face competition from not only their contemporaries, but also from their onshore counterparts in the future.

February 2007 saw the launch of a flexible Specialised Investment Funds (SIF) regime in Luxembourg. Victor Chan Yin, a partner with KPMG in Luxembourg, says the SIF creates new opportunities for alternative investment managers catering to qualified investors to establish their funds in a well regulated onshore jurisdiction.

"The SIF is governed by a more relaxed regulatory regime that compares favourably with what you might find in the offshore jurisdictions. The sphere of investors has been broadened and there is greater flexibility with regard to the investment policy that may be pursued by a Luxembourg domiciled fund.

"Importantly, a fund can be launched under the SIF rules without the need for prior approval from the Luxembourg Financial Regulator, the CSSF, and there is no status or financial position test applicable to the investment manager. This opens up Luxembourg as a jurisdiction for hedge fund boutiques that struggled to meet the conditions under the previous rules," he explains.

As the de facto home of the European traditional funds industry Luxembourg is in a strong position to challenge the dominance of the offshore jurisdictions in the alternative investment space.

So what are the implications for the offshore world?

Malde says Luxembourg has "a very good chance of establishing itself in this space" though he believes the offshore jurisdictions will continue play an important role in the industry for the foreseeable future.

"Cayman is very well established in the hedge fund industry. It has got the track record and people are comfortable with doing business there, so I think it will be difficult for other centres - even Luxembourg - to strip away that lead," he explains.

JPMorgan is covering its bases though, and Malde confirms that the company is building up its fund administration teams in the Grand Duchy in order to cater for the anticipated growth in hedge fund activity in Luxembourg under the SIF regime.

In Cayman Gus Pope also plays down the likelihood of significant numbers of hedge funds being established onshore in the short-term, though he does think onshore jurisdictions like Luxembourg will play an important role in the future of the industry.

"Changing the regulations is just a first step - Luxembourg still has to prove that it can deliver on the cost efficiency and timeliness side of things," he says.

"However, there is certainly a blurring of the lines between onshore and offshore, and I can envisage a situation, maybe 10 or 20 years from now, where the low tax onshore jurisdictions such as Dublin, Luxembourg and Delaware have the lion's share of the hedge fund business," adds Pope.

As the hedge fund industry continues to evolve, the offshore world will have to up its game if it is to stay relevant.

 

Geared for growth - Mauritius targets hedge funds

Mauritius only started to promote itself as an offshore funds jurisdiction at the turn of the Millennium, and as such is a latecomer to the business. The current push to establish the island as a contender in a crowded field is driven by the favourable double taxation treaties that Mauritius enjoys with India and China.

The fact that Mauritius entities are exempt from capital gains tax in India has already made them a popular vehicle for FDI in the subcontinent, and Malcolm Moller, managing partner in the Mauritius office of the offshore law firm Appleby, says the authorities are also keen to promote the island as a hedge fund jurisdiction.

"The concept of hedge funds using Mauritius as a domicile is inextricably linked to the benefits of the double taxation treaties with India and China. We are currently seeing a move towards Cayman based hedge funds setting up sub-funds in Mauritius to act as a conduit for their investments in India.

"China's new Enterprise Income Tax law, passed by the National People's Congress on 8 March 2007, will make Mauritius even more attractive. China's new law may make life more complicated for investors based in other tax free jurisdictions that do not have double tax agreements with China. At present, such companies do not have to pay withholding tax on their investments in China. However, as of 1 January 2008, they will be subject to a 20 per cent withholding tax."

The phenomenal growth of the funds industry in Asia could also play well for Mauritius as it seeks to establish itself as a real player in the offshore world.

"The government here is very keen to promote the financial services industry in Mauritius. The growth in Asia is creating real possibilities and a number of financial services firms have set up here with a view to taking advantage of that," says Moller.

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Shaggy Rogers

The UK – leading the fight against anti-corruption

The latest edition of the Distressed Debt Report (DDR), has been prying into the failure of two Bear Stearns hedge funds domiciled in the Caymans – where more than 80% of the world’s 8,000 hedge funds are registered. Regulators in the U.S. state of Massachusets say that Bear Stearns has been using Cayman to shield the directors of the two funds from their duties to investors. The directors refused to respond to subpoenas, claiming that the U.S. regulators have no jurisdiction in Cayman. Cayman insists, of course, that all is above board.
Whatever the truth, the DDR’s reporter Reg Crowder describes something else. He discovered, after rooting through internal UK Home Office and Foreign & Commonwealth Office documents, that when the British government ratified the UN Convention against Corruption (UNCAC) in February 2006 (why so late?), it exempted Cayman and all the other overseas territories and crown dependencies like it! “In effect,” he writes, “the British government exempted most of the world’s offshore money centers.”

The UK claims to be in the forefront of the international fight against corruption. But in light of this, and other ghastly scandals such as the BAE affair, It might be more accurate to say this: Britain is at the forefront of the fight against the fight against corruption.
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Back To Today's News

Bankrupt Cayman Islands hedge-fund clients file new claims
Published on Friday, December 7, 2007Email To Friend    Print Version

By David Scheer 

WASHINGTON, USA (Bloomberg): Bear Stearns Cos. clients hit with about $62 million in losses tied to the June collapse of two Cayman Islands hedge funds began filing claims this week, accusing the bank of deception and other misconduct, plaintiffs' lawyers said.

At least 11 institutional and retail investors will file arbitration cases with the Financial Industry Regulatory Authority, said Steven Caruso, one of a group of attorneys handling the claims. One was filed this week by a Cayman Islands investment manager seeking $1 million in damages, according to a copy of the complaint, which didn't identify the plaintiff.

"Officials at Bear Stearns engaged in a concerted effort to conceal the true state of affairs at both of these hedge funds for an extended period of time before they imploded," said Caruso, a partner at Maddox Hargett & Caruso PC in New York. Client losses ranged from $1 million to $8 million.

Bear Stearns, the fifth-largest US securities firm by market value, sought bankruptcy protection for two hedge funds in July after rising defaults on subprime mortgages led to losses. The funds' collapse triggered regulatory probes and investor lawsuits. Arbitrators at Washington-based Finra hear cases brought by investors against their brokerages.
http://www.caribbeannetnews.com/news-4859--30-30--.html
The claims announced on Wednesday target two Bear Stearns divisions on behalf of people who suffered losses in the Bear Stearns High Grade Structured Credit Strategies Enhanced Leverage (Overseas) Fund. As a so-called feeder fund, it had invested in the two hedge funds that collapsed.

Russell Sherman, a spokesman for New York-based Bear Stearns, said he couldn't comment on the case because he hadn't seen the claims.

Cases are being brought by four law firms. The others are Aidikoff, Uhl & Bakhtiari in Beverly Hills, California; Page Perry LLC in Atlanta; and David P. Meyer & Associates Co. in Columbus, Ohio.

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Billionaire Lewis raises stake in Bear Stearns

Fri Dec 7, 2007 10:47am EST
 
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NEW YORK (Reuters) - Joseph Lewis, a billionaire who snapped up a big 7 percent stake in hard-hit investment bank Bear Stearns Cos (BSC.N: Quote, Profile, Research) three months ago, has boosted his investment to 8.01 percent, according to a regulatory filing on Friday.

Lewis, a reclusive London-born investor, made a big splash in September when he snapped up $860.4 million worth of the bank's sagging stock to become one of its largest shareholders in less than a month.

According to the new filing, Lewis owned 9.25 million shares of Bear Stearns as of December 5.

Overall Lewis and several investment vehicles he controls paid a total of $1 billion for the shares, the filing said. He paid more than $118 a share for all of his acquired shares over the past 60 days.

But so far, based on Bear's closing price of $98.21 Thursday, those shares are worth just $908.74 million, leaving Lewis down roughly $100 million.

Bear Stearns shares have plunged 41 percent in the past year as the slumping mortgage market hurt the bank's biggest businesses and prompted write-downs on mortgage-related assets. Bear also suffered a hit to its reputation as a savvy bond trader in July when two mortgage hedge funds it managed were forced into bankruptcy.

Lewis' stake exceeds that of Bear Stearns Chairman and Chief Executive James Cayne, who holds about 5.8 percent of the company's stock, including restricted stock and incentive-plan shares.

Lewis' move is the latest significant change in Bear's shareholder base. It comes less than two months after China's CITIC Securities Co (600030.SS: Quote, Profile, Research) and Bear forged a deal to swap stakes in each other, giving Bear greater access to China's burgeoning stock brokerage business and aid CITIC's global expansion plans.

Bear said it would buy $1 billion of CITIC debt that would convert over time to a 2 percent stake in the Beijing-based firm, while CITIC would invest about $1 billion in Bear Stearns securities that would convert to about 6 percent of the New York-based investment bank.  Continued...



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Market Scan
Lewis Back For More Bear
Andrew Farrell, 12.07.07, 1:45 PM ET

Bear Stearns
Tear Sheet  Chart  News
 



Big write-downs have become almost commonplace for banks and brokerages because of the troubled mortgage market but that hasn't deterred Joseph Lewis. The billionaire has increased his already sizable stake in Bear Stearns.

Documents filed with the Securities and Exchange Commission Friday revealed that Lewis upped his stake in Bear Stearns (nyse: BSC - news - people ) to 8%. Lewis now owns about 9.3 million shares of the brokerage. Shares of Bear Stearns rose $4.47, or 4.6%, to $102.68.

Earlier this year, Lewis bought a 7% stake in Bear Stearns for $860.4 million. (See: "Billionaire Lewis Bullish On Bear") Lewis is the world's 369th wealthiest person with a fortune of $2.5 billion. The Bahamas resident began his path to riches with his family's catering business and moved into currency trading in the 1970s.

Lewis is taking a stake in Bear Stearns relatively cheaply. Shares of the company have tumbled 39.1% during 2007 because of the brokerage's mortgage holdings. In July, Bear announced that two of its mortgage-holding hedge funds were nearly worthless. (See: "Bear Scare")

The value of mortgage securities dropped precipitously this year because of spiking defaults on subprime mortgages. Many home buyers with poor credit haven't been able to pay their bills after taking advantage of loose lending standards to buy pricey houses.

Lewis isn't the only foreign player that has recently taken a stake in Bear Stearns. In October, Bear Stearns and Citic Securities announced they would swap stake in one another. In return for its investment in Bear Stearns, Citic will receive securities that can be converted into about 6% of Bear Stearns' outstanding shares. Citic Securities, the largest brokerage in China, is part of the state-controlled Citic Group, China's largest financial conglomerate. (See: "Citic Riding Bear Overseas")

Brokerages traded mostly higher Friday. Shares of Lehman Brothers (nyse: LEH - news - people ) rose $1.65, or 2.6%, to $64.79; shares of Morgan Stanley (nyse: MS - news - people ) rose $1.49, or 2.9%, $53.07; and shares of Merrill Lynch (nyse: MER - news - people ) rose $1.09, or 1.8%, to $62.40.

The effect of subprime mortgages on the major brokerages will become more apparent next week when they start announcing their fourth-quarter earnings. Lehman Brothers (nyse: LEH - news - people ) is first in line. It will announce its results on Thursday.

http://www.forbes.com/2007/12/07/bear-stearns-update-markets-equity-cx_af_1207markets18.html?partner=alerts
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Ed Cage
This is *GREAT* stuff Smurf!

Keep it coming!

Mr Ed
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Thanks MR ED

 
Bear Stearns faces new round of hedge fund claims

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REUTERS

6:27 a.m. December 5, 2007

NEW YORK – The first of a new round of investor claims was filed against Bear Stearns Cos. on Wednesday for its role in managing two mortgage hedge funds that collapsed earlier this year, securities lawyers said.

The claims, which will be submitted to the Financial Industry Regulatory Authority (FINRA) for arbitration, represent more legal challenges for Bear Stearns, which recorded losses this summer.


The first of at least 11 new claims involves an unidentified Cayman Islands fund-of-hedge funds manager that lost $1 million in the Bear Stearns High Grade Structured Credit Strategies Enhanced Leverage (Overseas) Fund.

FINRA keeps the names of arbitration parties confidential. Lawyers for the fund declined to identify their client. Bear Stearns spokesman Russell Sherman declined to comment, saying he had not seen the complaint.

Long considered one of the savviest bond traders on Wall Street, Bear Stearns suffered an embarrassing setback this summer as a rise in U.S. subprime mortgage defaults triggered a broader meltdown in mortgage-backed securities markets.

By the end of July, two funds managed by the bank – Bear's High Grade Structured Credit Strategies Fund and the High Grade Structured Enhanced Leverage Fund – had collapsed, wiping out about $1.6 billion of investments.

Now a group of lawyers for 11 investors with combined $62 million in losses says that Bear continued to sell shares of the funds this spring, when the subprime market was melting down.

According to the claim filed Wednesday, the unidentified fund-of-funds manager invested $1 million in the Enhanced Leverage (Overseas) Fund in March 2007, when the subprime mortgage market was already showing some signs of strain.

By June there were market rumors that subprime investments in the fund had suffered steep declines. Bear on June 22 confirmed that margin calls were draining needed liquidity, and by the end of July, the two funds filed for bankruptcy.

“Officials at Bear Stearns engaged in a concerted effort to conceal the true state of affairs at both of these hedge funds for an extended period of time before they imploded,” said lawyer Steve Caruso of Maddox, Hargett & Caruso in New York, one of four firms representing the fund-of-funds manager.

The lawyers claim Bear Stearns did not properly disclose ”related-party” transactions between the funds and other Bear Stearns divisions, nor did it explain the risks of illiquid securities held by the portfolios.

As one of Wall Street's top underwriters of mortgage-backed securities, Bear Stearns knew or should have known these markets had become extremely unstable, said Ryan Bakhtiari of Aidikoff, Uhl & Bakhtiari.

My gut feeling is these funds were used as a dumping ground by Bear Stearns,” said Bakhtiari, whose Beverly Hills, California, firm is also representing the 11 claimants, along with Page Perry of Atlanta and David P. Meyer & Associates in Columbus, Ohio.

The claims come three weeks after Massachusetts Secretary of the Commonwealth William Galvin charged Bear Stearns with engaging in related-party trades without required approvals from independent directors.

Law firms Zamansky & Associates and Rich & Intelisano in August filed the first investor arbitration claim against the High Grade Credit Strategies Fund. Navigator Capital Partners, a limited partner in Structured Credit Strategies Fund, filed a civil lawsuit against Bear Stearns in Manhattan state court.

(Editing by Steve Orlofsky)

http://www.signonsandiego.com/news/business/20071205-0627-bearstearns-arbitration.html

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Cayman Islands International Fishing Tournament 

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Cayman Islands in the Foreign Press
Published on Friday, December 7, 2007Email To Friend    Print Version

Cayman Islands project delays acquisition

BELLEVUE, USA: Reuters, December 5, 2007 – Cost-U-Less Inc said it would proceed with a shareholder vote on its proposed acquisition by Canada’s North West Company Fund for about $52.2 million. On Tuesday, North West said it expects a delay in the acquisition until mid-January 2008 in order to confirm the final capital expenditures associated with Cost-U-Less’s new store project in the Cayman Islands.


Cayman company faces trustee objection to cash-collateral request

NEW YORK, USA: Bloomberg News, December 3, 2007 – Monitor Oil Plc’s request to use cash collateral while it reorganizes shouldn’t be allowed because possible disputes haven’t been resolved, according to an objection from the US Trustee.

A lawyer for US Trustee Diana Adams said in documents filed today that the US Bankruptcy Court in New York had directed the trustee to confer with Monitor over the cash collateral as well as a separate request for a debtor-in- possession loan. The trustee, who oversees bankruptcy cases for the federal government, hasn’t resolved those inquiries, according to the filing.

“The proposed cash collateral order does not afford any creditors’ committee that may be organized —or other parties of interest — an opportunity to investigate issues,” the trustee said. The validity of liens is one subject that may need investigation, the trustee said.

Monitor, based in Grand Cayman, the Cayman Islands, filed for bankruptcy protection Nov. 21 after failing to win a contract to remove oil platforms near Norway.


Bear Stearns faces new round of claims over Cayman hedge funds

NEW YORK, USA: Reuters, December 5, 2007 – The first of a new round of investor claims was filed against Bear Stearns Cos. on Wednesday for its role in managing two mortgage hedge funds that collapsed earlier this year, securities lawyers said.

The claims, which will be submitted to the Financial Industry Regulatory Authority (FINRA) for arbitration, represent more legal challenges for Bear Stearns, which recorded losses this summer.

The first of at least 11 new claims involves an unidentified Cayman Islands fund-of-hedge funds manager that lost $1 million in the Bear Stearns High Grade Structured Credit Strategies Enhanced Leverage (Overseas) Fund.



Back... http://www.caymannetnews.com/news-3972--1-1--.html

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Michael Lewis

A Wall Street Trader Draws Some Subprime Lessons: Michael Lewis

By Michael Lewis


Sept. 5 (Bloomberg) -- So right after the Bear Stearns funds blew up, I had a thought: This is what happens when you lend money to poor people.

Don't get me wrong: I have nothing personally against the poor. To my knowledge, I have nothing personally to do with the poor at all. It's not personal when a guy cuts your grass: that's business. He does what you say, you pay him. But you don't pay him in advance: That would be finance. And finance is one thing you should never engage in with the poor. (By poor, I mean anyone who the SEC wouldn't allow to invest in my hedge fund.)

That's the biggest lesson I've learned from the subprime crisis. Along the way, as these people have torpedoed my portfolio, I had some other thoughts about the poor. I'll share them with you.

1) They're masters of public relations.

I had no idea how my open-handedness could be made to look, after the fact. At the time I bought the subprime portfolio I thought: This is sort of like my way of giving something back. I didn't expect a profile in Philanthropy Today or anything like that. I mean, I bought at a discount. But I thought people would admire the Wall Street big shot who found a way to help the little guy. Sort of like a money doctor helping a sick person. Then the little guy wheels around and gives me this financial enema. And I'm the one who gets crap in the papers! Everyone feels sorry for the poor, and no one feels sorry for me. Even though it's my money! No good deed goes unpunished.

2) Poor people don't respect other people's money in the way money deserves to be respected.

Call me a romantic: I want everyone to have a shot at the American dream. Even people who haven't earned it. I did everything I could so that these schlubs could at least own their own place. The media is now making my generosity out to be some kind of scandal. Teaser rates weren't a scandal. Teaser rates were a sign of misplaced trust: I trusted these people to get their teams of lawyers to vet anything before they signed it. Turns out, if you're poor, you don't need to pay lawyers. You don't like the deal you just wave your hands in the air and moan about how poor you are. Then you default.

3) I've grown out of touch with ``poor culture.''

Hard to say when this happened; it might have been when I stopped flying commercial. Or maybe it was when I gave up the bleacher seats and got the suite. But the first rule in this business is to know the people you're in business with, and I broke it. People complain about the rich getting richer and the poor being left behind. Is it any wonder? Look at them! Did it ever occur to even one of them that they might pay me back by WORKING HARDER? I don't think so.

But as I say, it was my fault, for not studying the poor more closely before I lent them the money. When the only time you've ever seen a lion is in his cage in the zoo, you start thinking of him as a pet cat. You forget that he wants to eat you.

4) Our society is really, really hostile to success. At the same time it's shockingly indulgent of poor people.

A Republican president now wants to bail them out! I have a different solution. Debtors' prison is obviously a little too retro, and besides that it would just use more taxpayers' money. But the poor could work off their debts. All over Greenwich I see lawns to be mowed, houses to be painted, sports cars to be tuned up. Some of these poor people must have skills. The ones that don't could be trained to do some of the less skilled labor -- say, working as clowns at rich kids' birthday parties. They could even have an act: put them in clown suits and see how many can be stuffed into a Maybach. It'd be like the circus, only better.

Transporting entire neighborhoods of poor people to upper Manhattan and lower Connecticut might seem impractical. It's not: Mexico does this sort of thing routinely. And in the long run it might be for the good of poor people. If the consequences were more serious, maybe they wouldn't stay poor.

5) I think it's time we all become more realistic about letting the poor anywhere near Wall Street.

Lending money to poor countries was a bad idea: Does it make any more sense to lend money to poor people? They don't even have mineral rights!

There's a reason the rich aren't getting richer as fast as they should: they keep getting tangled up with the poor. It's unrealistic to say that Wall Street should cut itself off entirely from poor -- or, if you will, ``mainstream'' -- culture. As I say, I'll still do business with the masses. But I'll only engage in their finances if they can clump themselves together into a semblance of a rich person. I'll still accept pension fund money, for example. (Nothing under $50 million, please.) And I'm willing to finance the purchase of entire companies staffed basically with poor people. I did deals with Milken, before they broke him. I own some Blackstone. (Hang tough, Steve!)

But never again will I go one-on-one again with poor people. They're sharks.

(Michael Lewis is the author, most recently of ``The Blind Side,'' and is a columnist for Bloomberg News. The views he expresses are his own.)

To contact the writer of this column: Michael Lewis in Berkeley, California, at mlewis1@bloomberg.net .

Last Updated: September 5, 2007 00:05 EDT

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Column: Foreign funds' help not free fix

Dec. 4, 2007 (Thomson Financial delivered by Newstex) --

NEW YORK (AP) - Don't think for a second that the sovereign wealth funds riding to the rescue of battered financial companies with big-time cash infusions are going to be passive investors forever.

These government-owned funds from places like China, Russia and Middle East oil producers can't be expected to stay silent if their investments in Citigroup (NYSE:C) , Bear Stearns (NYSE:BSC) and other companies ultimately don't go as expected.

Maybe they won't demand seats on corporate boards, but they still are likely to exert their influence -- and the investing public has to be ready for that to happen if we are going to welcome these funds into our markets as the saviors from today's current credit woes.

That's because these investors are far from ordinary. They have hedge-fund sized portfolios -- there are more than $2 trillion dollars in these government-run investment funds, according to the Peterson Institute for International Economics -- and many are far from forthcoming about their investment objectives.

That matters because sovereign funds have clear political affiliations and agendas, which raise concerns about national security issues.

In the past, such factors have derailed deals for some funds. There was the 2005 uproar over the Chinese state-owned oil company's s bid for U.S.-based oil and gas producer Unocal Corp., as well as intense political opposition last year to a Dubai-based fund's offer to buy into six U.S. shipping ports.

But now investors -- and even politicians like New York's Sen. Chuck Schumer, who led the fight against the ports investment -- seem giddy about the prospects of these sovereign funds rescuing the troubled financial world, which has been rocked by the collapse in the housing and mortgage markets.

The thinking goes: They're awash with cash, and we could use some of it badly, so it seems like a good pairing. That is especially true regarding the Middle Eastern sovereign funds, which have seen their holdings balloon due to surging oil prices in recent years.

Helping them gain favor in U.S. markets has been some old-fashioned public relations at work. They seem to be buying investment stakes that purposefully fall below levels that could inspire regulatory scrutiny, and they have signaled that they don't want to take an active role in how those businesses are being run.

How perfect. Have our money, no strings attached.

Abu Dhabi Investment Authority's $7.5 billion cash injection into Citigroup, announced on Nov. 26, has been highly praised because it comes just as the nation's biggest bank faces a possible capital crunch due to its massive mortgage-related asset writedowns.

The cash from that Persian Gulf state's sovereign fund, the largest in the world with an estimated $875 billion in assets, will be convertible into a 4.9 percent stake of Citigroup's stock at a price of up to $37.24 a share between March 2010 and September 2011. When completed, that will make it Citigroup's largest shareholder.

Until then, ADIA will receive an 11 percent annual yield on its investment -- higher than Citigroup's current 7.3 percent dividend yield.

ADIA officials stressed that they wouldn't attempt to influence how Citigroup runs its business, and analysts pointed out that the fund tends to have a long-term focus.

It's too early to know whether they will stick to their word. Should things turn around for Citigroup in the years ahead, they'll be rewarded for buying at the right price. Citigroup's shares now trade around $33 each, down more than 35 percent for the year.

But what happens if things don't go that way? As a major shareholder, they have the same right as every investor to react if Citigroup fails to produce the kind of returns the ADIA had hoped. They have plenty of tools available to convey their views: They could publicly denounce the CEO, press the company to shed some of its assets, or even sell their stake.

This isn't just an issue for Citigroup's investors. Sovereign funds have plunged $37 billion into financial companies and asset managers over the last six months, according to Morgan Stanley. (NYSE:MS) These contrarian bets come as that sector is the worst performer in the Standard & Poor's (NYSE:MHP) 500 index this year.

In early November, Bear Stearns Cos. and China's government-controlled Citic Securities Co. agreed to invest $1 billion in each other and combine some operations in Asia, giving the battered U.S. brokerage an entrance into the insular Chinese financial sector.

Dubai International Capital, owned by Dubai's ruler, bought an undisclosed stake in May in HSBC Holdings PLC (NYSE:HBC PR) (NYSE:HBC PRA) (NYSE:HBC) , which has also been plagued by the mortgage malaise. Seven months later, the bad news keeps coming at the Europe's largest bank, which last week said it would bail out two troubled funds it manages by transferring about $45 billion of their assets onto its balance sheet.

Investors all around need to closely monitor how the sovereign funds behave going forward. If we are going to welcome their money, we also have to live with them as shareholders.

They aren't investing out of the goodness of their hearts. They want returns, and don't expect them to be quiet if they don't get them.


Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org

Copyright 2007 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.



Newstex ID: AFX-0013-21424722

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