Back-Office Figure Emerges in Bear Stearns Investigation

That legal analysis may have been justified in early 2001, when the primary way for brokers to submit orders to Delvecchio's trade-processing group was by sending a fax. But within months of Maloney's letter, Bear Stearns already was moving toward a system by which its brokerage customers could submit orders electronically -- a far faster and more efficient method of communication.

Yet even with that electronic system in place, sources say, Bear Stearns continued to permit brokerages to submit late orders to buy and sell mutual fund shares. In fact, orders often were accepted up until 5:45 p.m. and processed at the 4 p.m. prices, as long as the broker submitting the order said the trade had been authorized before 4 p.m.

A class-action lawsuit filed in November against Bear Stearns charges the firm openly marketed its electronic platform to abusive mutual fund traders and the firm "generated substantial revenues and profits from participating in the illegal conduct." The lawsuit also alleges that some rogue traders were allowed to submit orders to buy or sell mutual shares before 4 p.m. and cancel them after the bell. Bear Stearns, in regulatory filings, has denied the allegations in the lawsuit.

Bear Stearns' repeated denials on late-trading don't sit well with Fred Dietrich, a former brokerage executive who was the recipient of that January 2001 letter from Maloney, and who provided a copy of the letter to TheStreet.com. Dietrich's former firm, Pentad Securities, recently won a $25,000 arbitration award against Bear Stearns in a dispute that involved allegations of late-trading.

"It just don't wash," says Dietrich, who charged that Bear Stearns had improperly processed several late mutual funds trades submitted by a former Pentad broker in March 2000. "If they were having such trouble handling all the order flow, they shouldn't have accepted the trades."