SEC's Bear Stearns Probe Deepens

Updated from 1:52 p.m. EST

The investigation into Bear Stearns'(BSC) role in the mutual fund trading scandal is getting personal, with regulators pursuing charges against current and former Bear Stearns employees.

Federal securities regulators have notified at least four current and former employees at the big Wall Street firm that they could face civil charges for assisting hedge funds engaged in abusive trading of mutual fund shares.

The Securities and Exchange Commission served so-called Wells notices on at least three former brokers and Peter R. Murphy, a senior managing director and one of the highest ranking executives in Bear's big clearing and operations division, according to broker registration records. The notices were issued in January.

The looming regulatory actions against the employees come nearly seven months after the SEC first notified Bear that regulators are considering bringing a civil action against the firm and its large clearing subsidiary. Bear is believed to be trying to negotiate a settlement with the SEC.

Late last year, the firm increased its litigation reserve by about $100 million to cover the cost of a potential settlement with securities regulators over the firm's alleged involvement in the mutual fund trading scandal.

Regulators believe Bear played an important role in processing and financing abusive mutual fund trades for dozens of hedge funds and small brokerages that have been implicated in the far-reaching scandal. The probe has resulted in more than $3 billion in fines and restitution from other firms.

TheStreet.com previously reported that regulators have been particularly interested the actions of a group of back-office employees whose main job was to process all mutual fund trades submitted to Bear by its own brokers and by dozens of small brokerages who cleared trades through the Wall Street firm.

One of the allegations regulators are looking into is whether Bear clearing executives matched up hedge funds interested in market-timing and late trading of mutual funds with small brokers willing to handle those trades. Bear also allegedly provided financing to the hedge funds to enable them to place bigger market timing bets.