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TheStreet Open House

Focus in Fund Scandal Turns to Bear Stearns

Market-timing is an arbitrage strategy in which time differences between the closing of U.S. and foreign exchanges are exploited. While market-timing is technically legal, most mutual funds say they prohibit it because the rapid in-and-out trading by hedge funds and other investors can dilute the value of a fund's holdings and hurt other investors. That's one reason regulators are cracking down on funds that permitted some investors to engage in market-timing.

Late-trading is an even more serious offense, because it's an activity in which a mutual fund company permits a favored customer to buy shares that were priced prior to the release of market-moving news, giving the investors an unfair advantage.

It appears market-timing and late trading became popular activities on Wall Street the past few years, as fast-money investors such as hedge funds tried to take advantage of the fact that mutual fund shares are priced just once a day, after the market's close.

A Bear Stearns spokesman declined to comment. The company's attorney, Lewis Liman, a partner at Cleary Gottlieb Steen & Hamilton and a former federal prosecutor, could not be reached for comment.

A spokesman for New York Attorney General Eliot Spitzer, whose office served a subpoena on Bear Stearns, also wouldn't comment. Also mum was the Securities and Exchange Commission, which has asked Bear Stearns to voluntarily turn over information about its involvement in mutual fund trading.

Bear Stearns, meanwhile, may not be the only Wall Street firm with a trade-clearing operation that may be coming under scrutiny.

On Wednesday, Bank of New York (BK), which has a major clearing business, said "various governmental and self-regulatory agencies have sought information from it" with regard to the mutual fund investigations. Bank of New York had been the clearing firm for D.C. Capital, a small Long Island, N.Y., brokerage that recently received a subpoena from Spitzer's office. Bear Stearns recently became the brokerage's clearing firm, according to a person familiar with the investigation.

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