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Bear Stearns Investor Sues for Securities Fraud

Investment bank Bear Stearns fraudulently hid the poor financial condition of a pair of now-bankrupt hedge funds while selling investors overpriced shares last year, an institutional investor has alleged in Manhattan federal court.

The lawsuit comes on the heels of JPMorgan's March 16 agreement to buy its troubled rival for the fire-sale price of $2 per share.

Last April Bear Stearns' shares were trading at around $150 each.

The suit, filed by investor Eastside Holdings in the U.S. District Court for the Southern District of New York, also names as defendants Bear Stearns CEO James Cayne, COO Alan Schwartz, former COO Warren Spector, CFO Samuel Molinaro Jr. and Executive Committee Chairman Alan Greenberg.

New York-based Bear Stearns allegedly knew in December 2006 that its Cayman Islands-based hedge funds, the High-Grade Structured Credit Strategies fund and High-Grade Structured Credit Strategies Enhanced Leverage fund, were facing large losses from investments in risky securities backed by subprime mortgage loans.

But in public statements last year Bear Stearns downplayed the funds' shaky condition and the risk to its business as whole, the suit says.

Last July the funds declared bankruptcy in Cayman Islands and U.S. courts.

The defendants' statements were false because they failed "to inform the market of the ticking time bomb in the company's hedge funds due to the deteriorating subprime mortgage market, which would cause Bear Stearns to have to rescue the funds, cause the company and its officers possible criminal liability, and hurt the company's reputation," the complaint says.

Widespread defaults on subprime loans, coupled with depreciating real estate, have caused a global credit crisis as the value of widely held mortgage-backed securities has fallen since last summer.

The suit says the defendants violated the antifraud provisions of federal securities law by hiding Bear Stearns' true financial picture from shareholders.

Eastside seeks to recover the loss in stock value on behalf of all investors who bought Bear Stearns' shares between December 2006 and March 2008.

The company has about 136 million shares of common stock outstanding, according to the suit.

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