Bear Stearns Faces Criminal And Civil Probes. Bear Stearns Cos., the seventh- biggest securities firm, faces federal criminal and civil probes into whether it helped Canary Capital Partners LLC make illegal mutual fund trades, people familiar with the matter said.
Bear Stearns is being investigated by the Securities and Exchange Commission and the U.S. Attorney for the Southern District of New York, the people said, speaking on condition of anonymity. At least eight brokers that Edward Stern’s Canary Capital used to execute trades at Bear Stearns and other firms are also being probed, the people said. Canary agreed to pay $40 million last year to settle civil claims of late trading.
Bear Stearns “would bend over backwards to help Eddie late trade,” said James Nesfield, 45, a former Stern consultant who was among three people who revealed Stern’s trading to New York Attorney General Eliot Spitzer last year. “Their system was subverted.”
The inquiry into Bear Stearns’ links to Canary is part of a broader investigation of the firm’s securities clearing unit and of the prime brokerage division, which offers trading, administrative and marketing services to hedge funds. Bear Stearns said in November that it had received “requests for information and subpoenas” from the SEC and the U.S. Attorney “in connection with mutual fund trading.”
Spitzer’s probe into Canary marked the beginning of a regulatory investigation into sales and trading practices in the $7.6 trillion U.S. mutual fund industry that has led to the departures of some 80 industry executives and the imposition of more than $1.7 billion in penalties.
JB Oxford
The SEC has notified at least one other clearing firm, Beverly Hills-based JB Oxford Holdings Inc., that it may be sued for letting hedge funds and mutual fund customers late trade. JB Oxford said in its annual report, released yesterday, that the SEC, Spitzer, and the Department of Justice are investigating “allegations that we improperly processed mutual fund trade orders.” The firm said it’s cooperating with the probes.
A spokeswoman for Bear Stearns, Elizabeth Ventura declined to comment on details of the investigation.
“We’ve completed a comprehensive internal review and taken appropriate action,” Ventura said. “We are continuing to cooperate with all regulatory authorities.”
Eric Tirschwell, a lawyer for Stern, declined to comment, as did SEC spokesman John Heine and Marvin Smilon, a spokesman for U.S. Attorney David Kelley in New York.
“If you find someone who is knowingly assisting in placing late trades, that’s aiding and abetting a securities fraud, and the SEC can sue,” said John Coffee, a corporate and securities law professor at Columbia University. “And any time you have aiding and abetting, the U.S. Attorney can charge that as a criminal offense too.”
Neither Bear Stearns, headed by Chief Executive Officer Jimmy Cayne, 70, nor any of its employees has been charged in connection with the investigations. Bear Stearns’ head of global clearing and prime brokerage is Richard R. Lindsey, a former market regulation director at the SEC.
Regulators have also said that Bank of America Corp. allowed Canary to use its clearing system for late trading. The bank agreed to get out of the clearing business as part of a $675 million settlement with the SEC announced on March 15.
List of Clients
At least one broker that Stern used sent employees in Bear Stearns’ clearing operation a list of clients, including Stern, who wanted to late-trade or make rapid mutual fund trades, one of the people familiar with the matter said.
Stern said in a March 2002 e-mail to Pacific Investment Management Co., which manages mutual funds, that he planned to trade Pimco funds through Bear Stearns’ clearing “platform.”
The e-mail was included in a lawsuit filed last month against Pimco’s parent company, Allianz Dresdner Asset Management of America, by the State of New Jersey. The suit accused Pimco of permitting Canary to improperly trade in the company’s funds at the expense of other fund shareholders. The firm has denied wrongdoing.
Bear Stearns also loaned money to Stern so he could bet more on the market, Nesfield said in an interview. The former consultant, hired by Stern to find funds and brokers who would facilitate his trading tactics, said late-trading and other abuses are hard to detect during clearing, in which numerous trades are processed together in large batches.
Direct Execution
Bear Stearns’ clearing unit processes about 200,000 transactions each day in 70 countries, according to the Bear Stearns website. The firm has policies aimed at preventing improper mutual fund trading.
By early 2003, Canary was able to execute trades directly through Bear Stearns, without relying on brokers, two people familiar the matter said. Bear Stearns generally allows clients of its prime brokerage division, which serves hedge funds, to clear securities trades directly.
Bear Stearns has fired at least two clearing division employees, Chris Welsh and Chris Fusco, in connection with the U.S. investigations, two of the people familiar with the matter said.
Welsh and Fusco couldn’t be reached for comment. Two people who answered calls made to Welsh and Fusco at Bear Stearns said they were no longer at the firm and declined to provide any contact information. Sherman, the Bear Stearns spokesman, and a lawyer representing the firm, also declined to provide contact information for Welsh or Fusco. Sherman declined to say why they had left the firm.
1999 Settlement
Regulators sanctioned Bear Stearns’ clearing unit in 1999 and the firm paid $38.5 million to settle SEC allegations that the unit helped brokerage A.R. Baron manipulate stocks. Richard Harriton, then president of the clearing subsidiary, was forced to resign and agreed in 2000 to pay $1 million to settle with the SEC. Bear Stearns and Harriton neither admitted nor denied wrongdoing.
The clearing unit last year produced $784 million in revenue, or 11 percent of the firm’s total. In the first quarter of this year, clearing services had revenue of $217 million, up 24 percent increase from the same quarter last year.
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