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Prime Brokers, Take Note
A recent decision issued by the Bankruptcy Court for the Southern District of New York (the 'Bankruptcy Court') in Gredd v. Bear, Stearns Securities Corp. (In re Manhattan Inv. Fund Ltd.), 2007 WL 60843 (Bankr. S.D.N.Y. Jan. 9, 2007) represents a significant event for securities firms, with potentially far-reaching implications for prime brokers.
In Gredd, Manhattan Investment Fund Ltd. (the 'Debtor') was engaged in a scheme involving 'shorting' technology stocks (i.e., it would bet that the stocks would decline in value). The Debtor established a brokerage account at Bear, Stearns Securities Corp. ('Bear Stearns') to facilitate the short-sale transactions. Under the terms of the Bear Stern account, money received from investors would be deposited into an account at Bear Sterns and would then be used by the Debtor for securities trading. Bear Sterns retained a security interest in the funds held in the account, and also had the right to prevent withdrawals from the account in order to cover any unsatisfied obligations stemming from the Debtor's trading activity.
The Debtor's short-sale scheme collapsed during the 'tech boom' of the late 1990s, leading to a Chapter 7 filing. The Chapter 7 trustee commenced an adversary proceeding against Bear Sterns pursuant to ' 548 of the Bankruptcy Code seeking to recover approximately $141 million in margin payments made during the year prior to the bankruptcy filing on the grounds that the payments constituted fraudulent transfers.
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