How Can a Hedge Fund That Suffers Losses from Investments in Collateralized Debt Obligations Prove Loss Causation in a Civil Suit?

On September 3, 2013, the U.S. District Court for the Southern District of New York (Court) dismissed a case brought by Banc of America Securities LLC and Bank of America (BOA) against Bear Stearns Asset Management (BSAM) and others.  The plaintiffs claimed that they suffered billions of dollars in losses caused by a fraud perpetrated by BSAM and three of its former directors.  The fraud related to a “CDO squared” investment, a collateralized debt obligation (CDO) comprised of CDOs constructed out of mortgage-backed securities taken from two of BSAM’s funds.  See “U.S. District Court Approves SEC’s Settlement with Bear Stearns Fund Managers Cioffi and Tannin,” Hedge Fund Law Report, Vol. 5, No. 26 (Jun. 28, 2012).  The Court’s analysis sheds light on an important issue that investors may face: How can a plaintiff similarly situated to BOA – for instance, a hedge fund that invested in CDOs, CLOs or other structured products – prove loss causation in a civil suit following investment losses?  What is the legal standard applied to expert testimony in such a context?  This article addresses these questions by summarizing the factual background of the case and the Court’s legal analysis.

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