The $160 million decision against Bear Stearns for failing to detect fraud at one of its prime brokerage clients is rippling through the Street. One could argue that it would be very difficult for a prime broker to know if fraud was at play at one of its clients. Hedge funds are loathe to hand out information about their operations, especially to brokers, who likely have other hedge fund clients, including some at their own company. The roots of this case reach back to the Manhattan Investment Fund, which blew up infamously. The trustee sued Bear Stearns in bankruptcy court seeking money that the fund gave the broker, which was used as collateral to trade. It can get pretty technical, but it raises questions about what prime brokers need to know about their customers and what good-faith efforts are required.

For more:
- here's a New York Times article