Bear Stearns Counts Cost of Due Diligence Failure

OffshoreAlert

MIAMI, FL: March 8, 2007

Bear Stearns Securities Corp. has learned the hard way about the dire financial consequences of failing to conduct proper due diligence on a client and ignoring red-flags.

On February 20, 2007, the U. S.-based securities broker was ordered by a U. S. Bankruptcy Judge in New York to repay $159 million to the Trustee of Manhattan Investment Fund Ltd., a New York-based, British Virgin Islands-registered hedge fund that collapsed in 2000 amid allegations of fraud and with an estimated net insolvency of approximately $400 million.

The $159 million award against Bear Stearns is a whopping $156.6 million more than the total fees of $2.4 million that the broker received for providing services to the fund from 1996 to 2000 and provides a stark example of the huge risk-to-reward gulf if your company’s due diligence procedures are not what they should be.

The award was based on $125 million in margin payments that the Fund made to Bear Stearns from its account at the Bank of Bermuda in the year before the Fund filed for bankruptcy on March 7, 2000, plus pre-judgment interest of $34 million.

The transfers took place after Bear Stearns first became aware of potential problems in December, 1998, stated U. S. Bankruptcy Judge Burton R. Lifland in his written judgment. However, the securities broker failed to investigative properly, doing little more than asking the fraud’s mastermind, British national Michael Wolfgang Berger, whether he was involved in any wrongdoing, according to the judge, who likened the approach to “wearing blinders”.

“Based upon the information it had, Bear Stearns was required to do more than simply ask the wrongdoer if he was doing wrong,” stated Lifland.

“Diligence requires consulting easily obtainable sources of information that would bear on the truth of any explanation received from the potential wrongdoer.”

Such “sources of information” and all aspects of conducting due diligence into hedge funds and their operators will be discussed in detail at the 5th OffshoreAlert Financial Due Diligence Conference, which will be held at the Hotel InterContinental, in downtown Miami, on April 24-25, 2007.

Attendees will learn how to avoid the costly mistakes made not only by Bear Stearns but also the Manhattan Investment Fund’s administrator, Fund Administration Services (Bermuda) Ltd., and auditor, Deloitte & Touche (Bermuda), which previously agreed to pay $40.8 million and $32 million, respectively, for unwittingly providing services to the fraudulent scheme.

More information about this and other topics to be discussed at the 5th OffshoreAlert Due Diligence Conference can be viewed online at http://www.offshorealertconference.com/OACV/agenda.asp.