Bear Stearns Says SEC Weighs Charges

Other brokers and hedge funds implicated in the trading scandal for whom Bear Stearns either cleared or processed trades include Samaritan Asset Management, Kaplan Securities, Brean Murray, Canary Capital Partners, Ritchie Capital and Ilytat.

Canary is the now-infamous New Jersey hedge fund that agreed to a $40 million settlement with New York Attorney General Eliot Spitzer when the scandal broke last fall. Among the abuses Canary allegedly carried out were late trading, in which mutual fund orders are placed at stale prices, and market-timing, a sophisticated arbitrage strategy involving lots of rapid-fire trades in a single fund. The former is illegal, the latter is not.

Investigators have been probing whether Bear aided and abetted this abusive trading either by turning a blind eye to the activity, or actively assisting the rogue traders. In recent weeks, they have sought information from James Delvecchio, an operations manager in the firm's clearing business who had an intimate view of the trading activity of hundreds of small brokerages that submitted and cleared mutual fund trades through Bear. Delvecchio himself is not thought to be a target of the probe.

Clearing is the arcane but crucial service on Wall Street by 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 were said to be looking for patterns which 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.

The investigation has led to a number of firings and dismissals in Bear Stearn's clearing operation.

Clearing is big business for Bear Stearns. In the second quarter, the division had net revenue of $223.7 million, up 19% from a year ago. Clearing, which includes the firm's lucrative prime brokerage work for hedge funds, accounts for about 13% of the firm's net revenue.

In an earlier settlement with Bank of America over its role in the mutual fund investigation, regulators forced the bank to get out of the clearing business.