Read the court papers in full

Barclays is suing Bear Stearns for allegedly misleading it over the performance of two collapsed hedge funds that were used as collateral for a $400 million (£200 million) loan.

The two funds collapsed in June after sub-prime losses, wiping out $1.6 billion of investors' funds.

Barclays has described the collapses in court papers filed in New York as "one of the most shocking and high-profile fund failures of the last decade".

Barclays said that it had lent up to $400 million to Bear's asset management division (BSAM).

It claims that it was defrauded by the unit and Matthew Tannin, a Bear Stearns fund manager, with the help of Ralph Cioffi, another executive.

Mr Cioffi is already under investigation by the Securities and Exchange Commission, the American regulator, over allegations that he withdrew about $2 million of his own money from one of the funds before its collapse.

Barclays alleges that Mr Cioffi and Mr Tannin misled it over the value and security of the funds, the High-Grade Structured Credit Strategies Fund and the High-Grade Structured Credit Strategies Enhanced Leverage Fund.

In the court papers Barclays also claims that Bear Stearns dumped troubled investments in the riskier of the two funds.

It states: "Bear Stearns, BSAM and Cioffi hatched a plan to make more money for themselves and further to use the Enhanced Funds a repository for risky, poor-quality investments by creating a new investment vechicle called Everquest Financial Ltd ... co-led by Cioffi and through which he stood to benefit personally."

In a statement issued to The Wall Street Journal, Bear Stearns said: "While we do not like to see investors or counterparties lose money, we believe this lawsuit is an attempt by Barclays to avoid taking responsibility for its own actions."

Barclays is understood to be seeking unspecified damages, in an amount to be determined in a jury trial, the Journal reports.

Sources close Barclays said that the bank had been talking to Bear Stearns for a long time over the summer, but after months it failed to reach a satisfactory conclusion.

Bear Stearns is expected to reveal the first quarterly loss in its 84-year history later today.

James Cayne, its chief executive, and other leading executives have waived their bonuses for the year.

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