After Bear Stearns sent a letter to investors regarding the essential collapse of two of its hedge funds, stating that "there is effectively no value left for the investors in the Enhanced Leverage Fund and very little value left for the investors in the High Grade Fund," several insiders say the losses were worse than expected.

Alpha Capital Management's Brad Alford, who talked one investor out of the fund early enough, says his client is extremely grateful and will probably "be a client for life," as he saved him millions. "It was not a surprise that the Enhanced fund was wiped out, but as for the flagship is a tremendous shock to everyone," Alford says, referring to the High Grade fund, which lost 91% of its value.

While Alford's client was fortunate, that wasn't the case for many others. One investor in the Bear funds, who spoke on condition of anonymity, said he was "very angry," after having received the letter. "I will sue them in a few weeks if there is no further offer to make restitution, the odds of which I put at 10% or less," the investor says.

According to some lawyers, that investor won't be the last to consider legal action. Ron Geffner, a partner at law firm Sadis & Goldberg, which focuses on hedge funds, says that his firm is in the process of conducting an analysis for "at least one investor" that retained its services. The firm is currently reviewing factual information and will determine in the next few days whether there is sufficient basis for a lawsuit, in which they would seek to recover the initial investment and ask for damages, he says.

Investing in a hedge fund is often risky business; the potential lawsuits would not be filed as result of the funds losing money, but rather not holding assets investors believed them to be holding.

"Someone is going to have to explain how assets that were AA' or AAA'-rated lost 86% of their value in a single month," says Douglas Hirsch, a Sadis partner who is working on the case. "I find it incredulous that a fund with 90% in assets in AA' could lose that much. To me, it is indicating that the bond was rated improperly or something else is amiss."

Hirsh says that with the magnitude of the losses and "given the representation by Bear that this was a safe investment," he expects to see a lot of lawsuits. "The fund is called High Grade,' after all."

Bear Stearns declined to comment.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.