That's the crux of the lawsuit. Is Barclays' claim of fraud and cover-up going to stand, or can Bear Stearns take the position that Barclays' own risk people should have seen the problem? Barclays asked for a jury trial. If this case does eventually make it to court, can a jury be persuaded to feel sorry for one financial institution being screwed by another and rule in its favor? Or will a jury just see this as Barclays being a big bank that should have known better?

The lawsuit does quote a number of emails, such as this one from Bear Stearns' senior managing director Matthew Tannin (also named as a co-defendant), who says, "I don't want to sound like a broken record but the value of this transaction lies in the transparency of credit information on high underlying credit quality assets. We have a lot of it and you can have it as often as you want. We'll even chew it up for you and give you customized reports." Barclays says it was promised this type of transparency and that helped persuade it to participate in the Enhanced Fund. The suit goes on to describe how all the promises of transparency were broken throughout the dealings with Bear Stearns on this fund.

The most damning set of emails are ones quoted between Tannin and Ralph Cioffi, manager of the fund and another co-defendant, called "liquidity game plan." In one email quoted in the suit, Tannin says to Cioffi, "What we need to figure out is how to get the majority of our [limited partners] into the enhanced fund. That will take some time but once we do that we have an easy liquidity source and that's Barclays." You can read more about Cioffi's methods in a post on Klio Funding by Peter Cohan.

Barclays laboriously outlines all the problems it had getting the detailed reports that were promised and the misinformation that was received about the value of the fund. As late as June 14, Barclays received a spreadsheet showing that the fund had gains through June 12, 2007, of almost 6%. Then finally Barclays received notice on July 17, 2007, that the Enhanced Fund fell by more than 38% in value in May. In mid-July 2007, BSAM admitted to the feeder fund investors that their investment had been completely wiped out in June.

Barclays made a string of what it calls loans to Bear Stearns as part of this deal that some estimate are between $300 and $400 million, but Barclays did not ask for a specific amount in the lawsuit. It also asked for punitive damages.

Two criminal investigations surround the feeder funds involved, the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund and the High-Grade Structured Credit Strategies Enhanced Leverage (Overseas). Bear Stearns announced their collapse in July, and almost $20 billion in investors' funds were wiped out overnight. The SEC and the U.S. Attorney's office are investigating Cioffi, relating to possible insider trading when he withdrew millions of dollars from the fund in February and March 2007. The Massachusetts Securities Division was examining whether Bear Stearns entities improperly traded with the funds without the required disclosure and approval from the fund's independent directors.

Should Barclays have been more savvy and stopped pumping money into the deal? Probably. But, if Barclays' claims of cover-up are proved in a court of law, should Bear Stearns be allowed to perpetuate this type of fraud, even if it's against a bank that should have known better? Only a court can decide that, but what do you think?

Lita Epstein has written more than 20 books including the Complete Idiot's Guide to the Federal Reserve.