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Home > Cases > Bear Stearns Hedge Funds > Massachusetts Files Claims Against Bear Stearns

Massachusetts Files Claims Against Bear Stearns

An article dated November 15, 2007, in The Wall Street Journal reported that Bears Stearns was the target of an administrative complaint filed by the Commonwealth of Massachusetts on charges of improper trading of mortgage-backed securities with two internal hedge funds that collapsed this past summer. The funds include the Bear Stearns High-Grade Structured Credit Strategies Fund and the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund.

Wall Street Journal reporters Jennifer Levitz and Kate Kelly wrote that Bear employees are alleged to have made hundreds of principal trades for the firm's own account using the hedge funds without giving the funds' independent directors proper advance notice.

Federal securities laws require financial firms that engage in principal trades with affiliated funds to notify the funds' investment advisors in advance of any trading activity. Offering documents from Bear show that approval of two independent directors is required before the entities are allowed to trade with the company.

The Commonwealth of Massachusetts' administrative complaint alleges that 47% of the principal trades conducted by one of the funds between 2003 and 2006 failed to secure the necessary approval. The current independent directors of the two funds, both of whom are executives at Walkers SPV Ltd., a fund administrator in the Cayman Islands where the funds were incorporated, refused to respond to the subpoena.

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