Bear Stearns Builds Reserves

The price of a mutual fund trading settlement just doubled at Bear Stearns (BSC).

Bear Stearns said late Monday it was increasing its legal reserves by 100% in light of "recent discussions" with regulators over the firm's role in the scandal. The Wall Street firm also said the $100 million reserve addition would take a big chunk out of its just-reported second-quarter earnings.

The comments came in a postclose filing with the Securities and Exchange Commission.

Last month Bear Stearns said the SEC voted to bring an enforcement action against the firm because of its alleged role in processing and financing abusive mutual fund trades for numerous hedge funds and small brokers. TheStreet.com had first reported the SEC vote, which occurred during a closed-door meeting on May 25.

Bear Stearns announced the SEC vote a week after it reported a 5% gain in second-quarter profits.

But in upping its legal reserve, Bear Stearns now says its second-quarter earnings will be reduced to $298 million, or $2.09 a share, from the previously reported $365 million, or $2.56 a share. Those figures compare with $347 million, or $2.49 a share, a year ago.

The reduction means that Bear Stearns' second-quarter profits actually fell 14% from a year ago, rather than rising the reported 5%.

Bear Stearns' better-than-expected earnings were well received on Wall Street. Before the second-quarter earnings announcement, analysts had expected the firm to earn $2.37 a share.

Bear Stearns officials declined to comment on Monday's filing.

TheStreet.com previously has reported that talks between the SEC and Bear Stearns have been slowed by a regulatory demand for a stiff penalty. Besides a significant fine, regulators also have considered forcing Bear Stearns to sell off all, or a portion, of its big correspondent clearing business. Bear Stearns, however, has said it believes it has "substantial defenses to the potential claims" and has been reluctant to sell any portion of its clearing operation, which provides back-office services to 350 small brokerages.

The firm's clearing operation, which includes its hedge fund prime brokerage business, accounts for 13% of its annual revenue.

Late Monday, Bear slipped 20 cents to $106.58.

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