Bank of America sues Bear Stearns, Cioffi and Tannin

Losses and Lawsuits

NEW YORK - Failed US bank Bear Stearns and two of its former hedge fund managers, Ralph Cioffi and Matthew Tannin, are being sued by Bank of America. The bank accuses Bear Stearns and both men - already indicted in June on federal charges of subprime market abuse - of misleading it in a "desperate" bid to obtain capital to prop up ailing hedge funds. Bank of America is seeking $2 billion from Bear Stearns, which has become part of rival Wall Street bank JP Morgan after its forced sale in April. JP Morgan has previously said it expects losses arising from litigation, consolidation and other issues surrounding the takeover to reach $6 million.

Tannin was Bear Stearns' head of asset management, while Cioffi was directly responsible for managing the funds in question.

Bank of America has claimed in the New York Federal Court that the two men were engaged in "egregious conduct" in their search for liquidity relating to a 'CDO-squared' transaction - effectively a further derivatives product on an existing collateralised debt obligation (CDO). According to the complaint, mortgage-backed assets owned by the Bear Stearns hedge funds were used in the sale of securities packaged by Bank of America. The hedge fund losses were allegedly hidden from Bank of America, leading to the funds' eventual collapse and decline in value of the assets and securities themselves. Bank of America claims the damages were compounded by the men luring it into providing a further $1 billion in funding to keep the funds afloat, leading to what says were "significant losses".