Justice Department Joins Bear Stearns Probe

Federal prosecutors in New York are taking an active role in an investigation into allegations of improper mutual fund trades handled by Bear Stearns(BSC Quote), according to sources and securities regulatory filings.

People familiar with the investigation said U.S. Attorney James Comey has assigned a senior prosecutor in the securities fraud division to oversee the inquiry, which appears to be in its early stages.

The Securities and Exchange Commission and the New York Stock Exchange also are investigating Bear Stearns. New York Attorney General Eliot Spitzer, whose office served a subpoena on Bear Stearns several months ago, is taking a back seat in the inquiry and deferring to the federal prosecutors, sources said.

A Bear Stearns spokesman declined to comment on the investigation. A Comey spokesman also declined to comment.

The focus of the inquiry by federal prosecutors is not entirely clear, but Bear Stearns processed and executed trades for many of the hedge funds and small brokerage firms in the middle of the fast-expanding trading scandal. Two brokerages that used Bear Stearns to process and clear some of their customers' questionable mutual fund trades are Kaplan Securities and Empire Financial Holding(EFH Quote), both of Florida.

Last week, Bear Stearns fired six employees from its private client group who allegedly helped some of the firm's hedge fund customers trade shares of mutual funds.

Also, a recently filed lawsuit in Manhattan federal court alleges that Bear Stearns played a pivotal role in the trading scandal by making it easier for hedge funds and brokerages to engage in improper trading of mutual funds sold by Janus(JNS Quote) and Putnam Investments, a division of Marsh & McLennan(MMC Quote). The lawsuit contends Bear Stearns created and marketed an "electronic routing system" that made it easier for hedge funds and small brokerages to trade shares of mutual funds.

Bear Stearns disclosed the Justice Department's involvement in the mutual fund inquiry on the securities registration forms for four of the brokers it fired last week. The Wall Street firm said it fired the brokers, along with two sales assistants, because of the outside investigations and the findings of its own "internal review into the trading in shares of mutual funds."