A major class-action law firm is weighing whether to file a lawsuit against Bear Stearns over massive losses in two subprime hedge funds, according to people close to the matter.
It would be the first such lawsuit brought over the collapse of the funds, though many more are expected.
The firm, Bernstein, Litowitz, Berger & Grossman, could make the filing as soon as Monday or in the coming days, these people say.
However, a potential stumbling bock has emerged: Whether the law firm can assert that an entire "class" of investors has been harmed by any alleged mistatements made by Bear Stearns that kept investors from bailing out of the fund earlier this year.
Bear Stearns disclosed last week that the two subprime hedge funds had lost nearly all of their value amid a rapid decline in the market for subprime mortgages.
Alleging that an entire class of investors was harmed allows the law firm to crank up the legal pressure on Bear Stearns. Class action lawsuits are controversial because attorneys receive a huge chunk of the judgment or settlements from their corporate targets.
But these lawsuit also can cost Wall Street big bucks. Major firms have shelled out billions of dollars to settle class action claims on behalf of investors who claim they were misled into buying risky stocks since the internet bubble burst in March 2000. For its part, Bernstein Litowitz won $6.1 million for investors who lost money in the 2002 Worldcom accounting scandal.
One person with knowledge of Bernstein Litowitz's deliberations says the firm is currently weighing the evidence it believes it has gathered against Bear Stearns over the implosion of its hedge funds, and whether it can file on behalf of a class.
Recent court rulings have made it somewhat more difficult to bring such cases, but attorneys close to the firm say the widespread losses with the Bear Stearns funds may make it easier to show widespread financial damage on behalf of a class of investors.
A spokesman for Bernstein Litowitz had no comment. A spokeswoman for Bear declined comment.