Back-Office Figure Emerges in Bear Stearns Investigation

A potential problem for Bear Stearns in its battle with regulators and prosecutors is that its policies for deterring market timing may have been selectively enforced, and that the firm's rules against late-trading were susceptible to abuse, say people familiar with the inquiry.

TheStreet.com previously reported that prior to 2001, Bear Stearns' clearing platform was known on Wall Street as an open door for small brokers with market-timing customers. Bear Stearns began to kick out those customers only after Delvecchio's group received a flood of angry emails from mutual fund companies in which some threatened to stop doing business with Bear Stearns' brokerage division.

This belated crackdown on market timers, however, wasn't comprehensive. Sources say the doors at Bear Stearns allegedly remained open to some big players, including Canary Capital, the New Jersey hedge fund led by Edward Stern that has been a central player in just about every aspect of the investigation into the $7.6 trillion mutual fund industry.

Bear Stearns' enforcement of rules against late-trading weren't much better.

An executive with one small brokerage that does business with Bear says all a trader had to do to get a late order processed at the 4 p.m. price was to vouch to Delvecchio's staff that an investor had placed the trade before 4 p.m. While that customer was never involved in any improper late-trading, he said, the procedures at Bear were ripe for abuse.

After the mutual fund scandal broke last September, Bear Stearns quickly moved to revise its policies on late trades. The firm's clearing desk told its customers that all trades had to be submitted by 4 p.m. in order to be processed at that day's closing prices. Any trades submitted after 4 p.m. would be treated as next-day trades, even if the trade was authorized before 4 p.m.