Defendant: Bear, Stearns

Not surprising, but another straw in the wind:

Investors in two Bear Stearns Cos. hedge funds took action against the company Wednesday for allegedly misleading them about the extent of the investment bank's exposure to risky mortgage-backed securities, a lawyer for the plaintiffs said.

The move comes as the two funds filed for bankruptcy protection, two weeks after the company told investors one was essentially worthless and the other had lost more than 90 percent of its value.

As the fate of those two funds moves into court, Bear Stearns said it moved late Tuesday to prevent investors from pulling money out of a third hedge fund, which had $850 million invested in highly rated mortgage-backed securities.

The company told investors the Asset-Backed Securities fund was not near collapse, but that it froze redemptions to prevent from being forced to sell assets to a market with little appetite for mortgage-related securities.

The 'nuclear waste' begins to spread.