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KBW Shorted Stock as Guaranty Financial Banker, Trustee Says

KBW Inc. was sued by the liquidation trustee for Guaranty Financial Group Inc., who accused the investment bank of using inside information about the Texas lender and shorting its stock before it collapsed.

Kenneth Tepper, the trustee, is seeking to recover $20 million in fees KBW obtained as Guaranty Financial’s investment banker, profit it received from betting against the company’s shares and other damages, according to a summons filed yesterday in New York State Supreme Court in Manhattan.

“KBW’s disregard of its contractual obligations and illegal and improper use of GFG’s and the bank’s material, non-public, confidential, inside information undermined GFG’s efforts to raise capital, one of the very purposes for which KBW had been engaged,” he said.

Guaranty Financial, based in Austin, Texas, filed for bankruptcy protection in 2009 after its Guaranty Bank was closed by regulators. Guaranty Financial hired KBW to help raise capital before the bank failed with more than $14 billion in assets, according to court papers.

Krista Eccleston, a spokeswoman for New York-based KBW, declined to comment.

The trustee on Aug. 22 sued cardboard-box maker Temple-Inland Inc., which spun off Guaranty Financial in 2007. Temple-Inland caused Guaranty Financial’s collapse by “fraudulently looting” the company of more than $1 billion, Tepper said. The lawsuit claims Temple-Inland operated the bank as “a captive finance arm” for its manufacturing operation and not as a traditional bank, according to the complaint.

The case is Tepper v. Keefe, Bruyette & Woods Inc., 652349-2011, New York State Supreme Court, New York County (Manhattan).

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