Early in May, as Bear Stearns executives scrambled to meet redemption requests from clients in two troubled hedge funds, a money management company affiliated with the Wall Street firm filed its intention to sell $100 million worth of shares to public investors.
Among the assets of the management company, Everquest Financial, were $550 million of debt securities purchased from the same Bear Stearns hedge funds that six weeks later would be the subject of a very public unraveling.
Everquest Financial's initial public offering statement on May 9 disclosed that substantially all the assets in its $700 million portfolio had been bought from the Bear Stearns High-Grade Structured Credit Enhanced Strategies Fund and the High-Grade Structured Credit Strategies Enhanced Leveraged Fund.
The filing did not disclose that those funds had suffered heavy losses in March and April as assets held in them, many backed by subprime mortgages, plummeted in value. Bear Stearns hedge funds also held a $400 million stake in Everquest.
Yesterday afternoon, Everquest withdrew its offering, which was in the earliest stages. The chief financial officer, Smita Conjeevaram, said in a regulatory filing that the company had decided against moving ahead. Everquest declined to comment further.
Had the filing gone through, Bear Stearns could eventually have sold its $400 million stake in Everquest, subject to Securities and Exchange Commission rules and so-called lockup arrangements.
The sale of that stake would have allowed the Bear Stearns funds to eliminate some of their exposure to the high-risk mortgages. With the filing withdrawn, Bear Stearns still appears to hold its Everquest stake.
Wall Street has been buzzing about the timing of the Everquest equity offering in particular because the Bear Stearns funds had encountered losses and redemption requests well before the filing appeared.
Last week, the investment bank, under pressure from its lenders, agreed to lend up to $3.2 billion to one of the hedge funds to help in an orderly liquidation of its assets.
An analyst at Portales Partners, Charles Peabody, said in a note to clients last week that Everquest appeared to be an investment vehicle used in part ''as a way for Bear Stearns to offload some of its own mortgage exposure.''
If Bear Stearns knew that two of its funds were in trouble by May, why did it allow the Everquest filing to proceed, Mr. Peabody asked.
Bear Stearns declined to comment.
Although the Everquest filing has been withdrawn, it nevertheless provides a glimpse inside the murky world of leveraged-debt investments that has attracted so much investor money in recent years.
It also shows how, in the bull market for risky-debt investing, potential conflicts of interest on Wall Street were presented as beneficial to investors.
Bear Stearns was central to the creation of Everquest, which is incorporated in the Cayman Islands but operated in Midtown Manhattan. In addition to selling securities to Everquest, Bear Stearns was to serve as lead underwriter of the stock offering, collecting lucrative fees.
Everquest had other ties to Bear Stearns as well. The new company was to be run by Michael J. Levitt, a founder of Stone Tower Capital, a private money management concern, and Ralph R. Cioffi, a senior managing director at Bear Stearns who also oversaw the troubled hedge funds.
The funds that sold the securities to Everquest invested in big pools of loans backed by home mortgages, known as collateralized debt obligations. Roughly half of Everquest's portfolio is invested in those securities, but it also owns collateralized loan obligations, backed by commercial assets.
According to its filing, Everquest began operation in September and paid almost $548.8 million to buy 10 collateralized debt obligations from the Bear Stearns hedge funds.
It paid Bear Stearns $148.8 million in cash and issued 16 million shares at $25 each to cover the rest. By the end of 2006, Everquest said its debt obligations had a value around $700 million.
During the first quarter of 2007, even as the subprime mortgage market was plummeting, Everquest bought $33 million more of debt securities.
The company hoped to use the proceeds of its stock offering to pay down part of a $200 million credit line it received from Citigroup Financial Products. A spokeswoman for Citigroup declined to comment.
While the Everquest filing did not discuss the hedge fund losses at Bear Stearns, it did highlight the enviable returns generated in recent years by Bear Stearns Asset Management. Average annualized returns, as of the end of 2006. were 12.6 percent, the filing said. Bear Stearns Asset Management, the prospectus said, ''has a strong track record'' in the C.D.O. arena and helped give the new firm a leg up on its competitors.
When Everquest acquired collateralized debt securities, the filing said, the assumptions it used for the performance of the assets were based on projections made by the organizations that put the debt pools together. While this might sound risky, the filing stressed the considerable risk-management skills of Mr. Cioffi and Mr. Levitt.
Bear Stearns Asset Management and Stone Tower Capital ''monitor assets in real time with systems that are designed to be early warning in nature, as opposed to systems that provide alerts only after an asset begins to deteriorate,'' the filing said.
The relationship between Bear Stearns and Everquest did raise questions about whether the new company overpaid for the securities it purchased from the Bear Stearns hedge funds, the prospectus noted.
''The consideration given by us in exchange for these assets was not negotiated at arms-length and may exceed the values that could be achieved upon the sale or other disposition of these assets to third parties,'' it said.
