Bear Stearns and several members of its senior management repeatedly misled investors in two sub-prime hedge funds to keep them from withdrawing money even as the funds were losing much of their value, according to an arbitration claim obtained exclusively by CNBC.
The claim, filed with the National Association of Securities Dealers on behalf of a 73-year-old investor, is the first by a investor who lost a large amount of money in the Bear Stearns High Grade Structured Credit Strategies Fund, or its sister fund known as the Bear Stearns Enhanced High Grade Structured Credit Fund.
Bear recently disclosed that both funds have been so hammered by the meltdown in the sub-prime market that they have almost no value. The claim takes particular aim at the funds’ manager, Ralph Cioffi, but also named--besides Bear Stearns and Cioffi--Richard Marin, the former head of Bear Stearns Asset Management division.
The claim asserts that that over the past year, Cioffi repeatedly downplayed both the exposure of the funds to the sub-prime market and just how bad the performance of the funds’ had deteriorated.
The investor, whose named is being withheld, allegedly lost $500,000 in the high-grade structured fund after listening to the advice of Cioffi, and his other Bear Stearns employees, during a series of conference calls that began in late 2006 through approximately June 2007, the claim says.
In March, for example, Cioffi allegedly told investors that the market for collateralized debt obligations, which are basically packages of sub-prime loans, was “stable” and while the next one to three months might be “challenging,” he added that 80% of the portfolio in the high-grade structured fund was hedged.
The claim, filed by the law firm of Zamansky & Associates, also alleges that Bear withheld valuable information about the funds’ declining fortunes from investors.
Another Bear Stearns executive mentioned in the claim, Evan Kerr, allegedly began telling investors in June that the fund was losing money, and attributed the reason for the late disclosure to managers getting their “marks late,” meaning they were just marking down the portfolio to reflect the declining market values. Even so, the claim said, Kerr downplayed the losses at the time, saying they were confined to just 12 to 15 positions.
Zamansky’s claim maintains that the alleged misrepresentations occurred during conference calls with many of the funds’ investors but not all of them.
A Bear Stearns spokeswoman had no comment immediately.
Attorney Jake Zamansky said he expects to file additional claims in the coming months. Zamansky says he believes Bear Stearns will offer a defense that the funds were marketed to sophisticated investors, but he added: “Sophisticated investors also ask the right questions, and they didn’t get the right answers.”
CNBC had earlier reported that Bernstein, Litowitz, Berger & Grossman, was likely to file suit seeking class-action status against Bear alleging similar charges. But CNBC has learned that the firm is having a difficult time meeting the criteria for a “class” of aggrieved investors, which includes allegations that material misrepresentations were made in materials sent out to investors.