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.
Bank of New York
, 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
, 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.