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KBW Ordered to Face Suit by Guaranty Finanancial Trustee

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Sept. 20 (Bloomberg) -- KBW Inc. may face a lawsuit by the liquidation trustee for Guaranty Financial Group Inc. accusing the investment bank of using inside information about the Texas lender and shorting its stock before it collapsed.

U.S. District Judge Sam Lindsay in Dallas ruled yesterday that Kenneth Tepper, the trustee, has standing to pursue a fraudulent transfer claim against KBW under the federal bankruptcy code as well as contract and securities fraud claims.

Tepper 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 the complaint filed in August 2011.

Lindsay granted KBW’s request to dismiss fraudulent transfer claims under New York and Texas law as well as a claim for breach of the duty of good faith and fair dealing. The investment bank had asked to have the entire lawsuit thrown out.

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.

By repeatedly shorting the lender’s stock, KBW caused a “substantial adverse impact” on the stock’s price and impaired Guaranty’s ability to raise capital, according to the complaint. “KBW knew there was no risk in shorting and sought to reap rewards for its illegal and improper use of such information through gains related to the short position,” Tepper alleged in court papers.

Mike Gelormino, a KBW spokesman, declined to comment on the ruling.

The case is Tepper v. Keefe, Bruyette & Woods Inc., 3:11-cv-02087, U.S. District Court, Northern District of Texas (Dallas).

To contact the reporter on this story: Tom Korosec in Dallas federal court at tkorosec@sbcglobal.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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