Barclays is suing Bear Stearns over what the bank calls "one of the most shocking and high-profile fund failures of the last decade".
Referring to the two collapsed hedge funds that were used as collateral for a $400 million loan, which collapsed in June after sub-prime losses, Barclays is accusing Bear Stearns of misleading it over their performance.
Barclays investors lost $1.6 billion after the High-Grade Structured Credit Strategies Fund and the High-Grade Structured Credit Strategies Enhanced Leverage Fund collapsed in the summer.
The bank stated in court papers that it had lent $400 million to Bear's asset management division (BSAM) and is accusing fund manager Matthew Tannin and Bear executive Ralph Cioffi of fraud.
Documents presented to the court state: "Bear Stearns, BSAM and Cioffi hatched a plan to make more money for themselves and further to use the Enhanced Funds a repository for risky, poor-quality investments by creating a new investment vehicle called Everquest Financial…co-led by Cioffi and through which he stood to benefit personally."
Bear Stearns has in turn accused Barclays of trying to shirk responsibility for investor losses.
Mr Cioffi is being investigated separately by the Securities and Exchange Commission, charged with withdrawing his $2 million investment from one of the funds before it collapsed.