Back-Office Figure Emerges in Bear Stearns Investigation

The investigation is unfolding at a time the SEC has made a preliminary determination to file civil charges against the much smaller trade-processing arm of J.B. Oxford(JBOH Quote) over its role in the mutual fund scandal. Sources say the SEC is getting close to making a decision on whether to pursue civil action against Bear Stearns. If the agency does, it would mark a major new salvo in the mutual fund probe, adding a first-tier Wall Street brokerage to the long list of mutual fund managers and hedge funds that have paid a total of $2 billion in settlements so far.

To date, brokerages have largely been ignored in the mutual fund investigation. Bear Stearns has become a target of investigators because of its enormous role in clearing, an arcane but crucial service on Wall Street in which a firm acts as a middleman for parties doing stock and bond transactions. The clearing divisions of big Wall Street firms like Bear are crucial to the hundreds of smaller brokerages -- known as "correspondents" -- that lack the financial resources and back-office muscle to make sure big sales of securities go off smoothly.

Regulators are looking for patterns that would show that however passive Bear's role might have been in clearing trades, its permissiveness -- particularly with big clients -- amounted to an invitation to game the system. Indeed, that allegation was the basis for a class-action lawsuit filed against the firm in November by mutual fund investors who said Bear actually marketed its platform to big-time market timers.

Delvecchio is in a better position than most to know what the firm did or didn't do about abusive trading, because all the mutual fund trading tickets submitted to the firm's clearing desk passed through his office and his team of order clerks.