Bear Stearns' Market 'Timing Group' Draws Scrutiny

Officials at Empire could not be reached for comment. But the firm is one of several small brokerages that cleared trades through Bear that have been implicated in the investigation. In November, Empire disclosed that the SEC had served a subpoena on the company and four of its employees in connection with the mutual fund trading investigation.

The doors at Bear Stearns remained open to others, however, including Canary Capital Partners, the New Jersey hedge fund led by Edward Stern that paid a $40 million fine last year over its role in the trading scandal.

"My understanding was that you could keep on doing it but within parameters," said James Nesfield, a former consultant to Canary and Stern. "(Bear) threw out anyone they didn't like, but kept a few like [Stern]. They went from being an open door for everyone to a more exclusive open door."

In the Pimco action, New Jersey regulators allege that brokers at Brean Murray, a small New York brokerage firm, used the Bear Stearns platform to place numerous market-timing trades for Canary and other clients in 2002.

So far, investors haven't paid much attention to the investigation of Bear Stearns. Shares of the Wall Street firm are up 19% since the TheStreet.com first reported in November that federal prosecutors and regulators were investigating Bear Stearns.

Investors appear to believe that Bear Stearns, which reported blowout first-quarter earnings two weeks ago, can weather any fine that regulators and prosecutors may impose on the firm. But investors should be mindful that it's not just fines Bear Stearns must fear.

In a reaching a settlement with Bank of America(BAC) over its role in the trading scandal, regulators required the bank to exit the clearing business by year's end. While no one is suggesting regulators want Bear Stearns to divest itself of its clearing business, a possible enforcement action against the firm could extend beyond a financial penalty.

Any new restrictions regulators might impose on Bear Stearns' clearing operation could limit the profitability of a division that accounted for $784 million, or 13%, of the firm's $6 billion in net revenues in 2003.

>To order reprints of this article, click here: Reprints