BEAR STEARNS SETTLES SUIT BY DELAWARE INSURER ALLEGING MISREPRESENATION OF DERIVATIVES INVESTMENT STRATEGY

Posted November 11, 2008

ORLANDO – A Florida state circuit court has ruled against Bear Stearns & Co. for misrepresenting an investment strategy including the use of collateralized mortgage-backed obligation (CMO) and collateralized debt obligation (CDO) securities. Bear Stearns’s acquirer, JPMorgan Chase, has agreed to settle for $27.4 million.

The plaintiff, the now-defunct National Heritage Life Insurance Company (NHL), is now controlled by the Delaware Insurance Commissioner in receivership as part of its liquidation. The case is similar to situations now occurring with hundreds of investments by insurance companies, pension plans, school boards, local governments and other institutions.

“The judge’s ruling allowed the state of Delaware to recover $26,852,806 in damages to NHL,” says Thomas K. Equels, Managing Director of the Equels Law Firm, which represented the Commissioner as Receiver of NHL. “In addition to the ruling, Bear Stearns faced a pre-judgment interest award and the court reserved jurisdiction to consider adding tax costs and prejudgment interest.”

As part of Bear Stearns’s investment strategy, it provided certain investments for purchase to assist in NHL’s goal of obtaining a “spread” above its annuity obligations to its policyholders according to the lawsuit. Those investments included substantial investments in “synthetic CMO portfolios.”

Despite written and verbal representations by Bear Stearns that these CMO portfolios were hedged, balanced, safe and secure, the investments recommended and selected by Bear Stearns were high-risk, extremely volatile, and completely inappropriate for NHL, according to the order issued by James E. Glatt, General Magistrate of the Ninth Judicial Circuit Court of Florida.