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Bear Stearns hedge funds given 30 days to refile bankruptcy petition, then must face investors

Bear Stearns hedge funds given 30 days to refile bankruptcy petition, then must face investors

A federal judge on Thursday denied Bear Stearns Cos. bankruptcy protection for two failed hedge funds it managed, but granted the investment bank 30 days to refile before investors can seize assets.
Judge Burton Lifland of the U.S. Bankruptcy Court in Manhattan denied Bear Stearns' Chapter 15 request, which would allow the funds to seek bankruptcy protection in the U.S. while liquidating in the Cayman Islands. The nation's fifth-largest investment bank must now petition under either Chapter 7 or Chapter 11 of the bankruptcy code to protect it from investors in the U.S.
A spokesman for Bear Stearns did not immediately return telephone calls.
The two funds place wrong-way bets on securities backed by subprime mortgage loans. As defaults and delinquencies increased in the mortgage industry, those funds lost significant value.
Liquidators working to unwind the Cayman Island-based funds estimate Bear Stearns' High-Grade Structured Credit Strategies Master Fund could see recoveries of $25 million (euro18.4 million). The High-Grade Structured Credit Strategies Enhanced Leverage Master Fund could see recoveries of less than $50 million.
Bear Stearns bought out investors' positions after Wall Street firms began demanding repayment by initiating margin calls on the funds, a rarely used strategy between investment banks.
The meltdown of two hedge funds exposes Bear Stearns to lawsuits, several of which have already been initiated.
Lifland said in a written opinion that the Cayman Islands was not the proper jurisdiction for them to liquidate assets. He said the "foreign proceedings are not eligible for relief" in connection with a Chapter 15 filing.
Under Chapter 15, added to the Bankruptcy Code in 2005, a company or court-appointed administrator may seek a U.S. court's recognition of a foreign bankruptcy case as the main, or controlling, proceeding.
Shares of Bear Stearns fell 40 cents to close at $106.70.


Updated : 2021-04-23 16:53 GMT+08:00