Back-Office Figure Emerges in Bear Stearns Investigation

People familiar with Bear Stearns' thinking don't deny that the old rule to deter late-trading could be violated. They say it wasn't the job of Delvecchio's crew to make sure its clearing customers were telling the truth about the time a trade was placed. It was the responsibility of the firm's clearing customers to guard against any illegal activity. Bear's defenders point to its standard clearing agreement, which requires small brokerages and their customers to abide by all applicable rules, law and regulations.

But people familiar with the inquiry say regulators and prosecutors are skeptical of this see-no-evil, hear-no-evil line of defense. Investigators are trying to determine whether officials at Bear Stearns knew there were rogue traders and brokers who were skirting the rules on late-trading and did nothing to stop it, or worse, aided and abetted the illegal activity.

One allegation being looked at by the SEC and federal prosecutors in New York is whether Bear Stearns officials helped Canary engage in late-trading.

Some critics suggest Bear Stearns' policy on late-trading looks questionable in light of advances in trading technology.

In a 2001 letter obtained by the TheStreet.com, Patrick Maloney, a Bear Stearns managing director and an in-house attorney, suggested the primary reason Bear Stearns allowed clearing customers to submit trades after the 4 p.m. deadline was because of a large "volume of faxes being received at the end of the day."

Maloney explained the deluge of faxes meant that some order tickets were not received by Bear Stearns until after 4 p.m. In light of that technological glitch, he wrote, it was OK for Bear Stearns to process those trades, as long as its brokerage customers had received authorization for those trades prior to the 4 p.m. deadline.