Bear Stearns sued over mortgage losses

By Jonathan Stempel

NEW YORK (Reuters) - Bear Stearns Cos (BSC.N: Quote, Profile, Research), which expects a fourth-quarter loss after writing down $1.2 billion linked to mortgages, has been sued by a shareholder who claims the Wall Street investment bank should have known it was overexposed to subprime lending.

The lawsuit, filed late on Monday in the U.S. District Court in Manhattan, accuses Chairman and Chief Executive James Cayne and other officials of being "well aware of the impending crisis" in mortgages before credit markets deteriorated in July.

It said Bear Stearns developed a scheme to conceal a "tremendously risky subprime mortgage portfolio," while at the same time overstating its financial condition and assuring investors the company had sound risk management.

Bear Stearns shares have fallen 42 percent this year, with most of the decline in the last five months. Its market value has fallen about $10 billion since mid-January.

The plaintiff, Samuel Cohen, said he lives in Baltimore and owns 115 Bear Stearns shares, and filed his derivative complaint on behalf of the bank and other shareholders.

He named as defendants Bear Stearns and 17 people including Cayne, President Alan Schwartz, former President Warren Spector, Chief Financial Officer Sam Molinaro and many directors.

The complaint seeks damages for the company, better corporate governance, splitting the chairman and chief executive roles, letting shareholders nominate one director, and other remedies.

Bear Stearns said in a statement the lawsuit lacked merit, and that the company would defend itself vigorously.

Bear Stearns announced the write-down at a November 14 investor conference. Molinaro then said the losses "conservatively reflect" conditions in a "very, very challenging environment (where) asset valuations have declined significantly."

Analysts on average expect a fourth-quarter loss of $1.36 per share, according to Reuters Estimates.

The write-down followed the summer collapse of two Bear Stearns hedge funds that invested heavily in collateralized debt obligations that were backed by subprime mortgages and became essentially illiquid.

Financial services companies have announced some $50 billion of write-downs of CDOs and other mortgage-related debt. The U.S. housing slump has led to soaring defaults and investor resistance to mortgage debt they once thought safe but now deem risky.

Bear Stearns shares closed down 18 cents at $93.87 on the New York Stock Exchange.

(Reporting by Jonathan Stempel; Editing by Andre Grenon, Dave Zimmerman, Toni Reinhold)