Investors in failed hedge funds seek to oust Bear Stearns

Investors who lost hundreds of millions of dollars when two Bear Stearns hedge funds collapsed in August are joining forces to replace Bear Stearns affiliates and designees as managing parties of the failed entities and set the stage for a thorough independent inquiry.

Institutional and private investors have joined together to seek the necessary proxies from investors representing at least 50.1 per cent of holdings in each of the funds. Two votes are scheduled starting next week first for the US fund, then for the overseas, Cayman-based fund. Shares held by Bear Stearns or its affiliates cannot be voted in the elections.

The campaign, the first of its type according to law firm Reed Smith, which represents shareholders with more than 25 per cent of the two funds, seeks to replace Bear Stearns affiliates and designees with FTI Capital Advisers, a broker-dealer registered with the Financial Industry Regulatory Authority.

FTI Capital Advisers is a wholly-owned subsidiary of FTI Consulting, which specialises in forensic accounting and investigations. The shareholders leading the campaign want FTI to conduct an independent investigation into how the two funds, which once had equity value in excess of USD650m, appear to have been rendered worthless.

Alongside FTI Capital Advisers, Bart Schwartz, a former chief of the criminal division of the United States Attorney's office for the southern district of New York, has been nominated to serve alongside the firm in managing the overseas fund.

'From the feedback we are getting, we believe we are close to having the necessary support to make it happen, but it is critical that every investor's vote be counted,' says Reed Smith partner Lance Gotthoffer. 'For those not yet aware of the elections, or who may not be able to attend in person, our clients have arranged for a representative to carry proxies into the election.'

Investors in the U.S. Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund will vote to replace the general partner on Wednesday, November 7 in Manhattan. A second vote to replace the directors of the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage (Overseas) fund is set for a week later, Wednesday, November 14, in London.

According to Gotthoffer, if the campaign is successful, FTI Capital Advisers and Bart Schwartz will assume legal responsibility to act in the best interests of all investors, not just the group that nominated them. 'It is too early to speculate on what FTI Capital Advisers and Mr. Schwartz might find, but we are confident that they will work diligently to maximise recoveries for creditors and investors of the funds,' he says.