On May 28^th 2008, The New York Times is reporting (via Reuters) that Liquidators Of Bear Stearns Funds Lose Court Appeal. Apparently the representatives of the two collapsed Bear Stearns Cos Inc hedge funds -- the High-Grade Structured Credit Strategies Fund and the High-Grade Structured Credit Strategies Enhanced Leverage Fund -- linked to risky mortgage investments have lost a court appeal seeking to have the funds liquidated in the Cayman Islands instead of in the United States.

The ruling by U.S. District Judge Robert Sweet in Manhattan upholds a bankruptcy court's decision last year requiring that the funds be liquidated in U.S. courts. Holding the proceedings in the Cayman Islands, home to many hedge funds for tax reasons, could have shielded the funds' assets from some U.S. creditors. The ruling could have implications for other funds that seek protection under Chapter 15 of the U.S. Bankruptcy Code, which covers cross-border insolvencies. The judge upheld the bankruptcy court's finding that the funds' "center of main interests," as defined by Chapter 15, was in the United States.

"It is hoped that resolution of these issues may provide some aid to navigation in these uncharted waters," Sweet wrote in the decision, dated May 22 and made public on Tuesday.

"The process by which the financial problems of insolvent hedge funds are resolved appears to be of transcendent importance to the investment community and perhaps even to the society at large."

Sweet said the liquidators did not adequately show that the funds had a sufficient connection to the Cayman Islands. At the time of the Chapter 15 petition, there were no fund assets in the Cayman Islands, the judge said.

Also, while the liquidators said that two fund directors resided in the Cayman Islands, "these directors have not been shown to have had any substantial involvement in the business of the funds," the judge wrote.

The liquidators, Simon Whicker and Kristen Beighton, of KPMG, had appealed a ruling by U.S. Bankruptcy Court Judge Burton Lifland in Manhattan last year.

Toomre Capital Markets LLC ("TCM") believes that this is a significant ruling that eventually will shed far more light on the murky activities surrounding these two Bear Stearns hedge funds whose collapse has marked the start of the current credit crunch. Whereas hedge funds prefer to operate in a world of restricted information and transparency, the United States Bankruptcy process is very transparent and much dirty laundry gets exposed in the process. Interested readers may want to check out the excellent article by Benjamin Feder on FinAlternatives.com entitled Reticent Hedge Funds Chafe Under Bankruptcy Code.

TCM certainly will be following with interest as information is finally revealed about just what Bear Stearns fund manager Ralph Cioffi did to get his two highly leveraged funds so off-sides that they collapsed in a matter of weeks. As this BusinessWeek article points out, the funds' investors have been quite stymied about getting any information about what really went on with this supposed professional hedge fund management firm.