SEC's Bear Stearns Probe Deepens

Market timing, or frequent trading of mutual fund shares, is legal, but it is prohibited under most mutual fund prospectuses because it can dilute the value of a portfolio's holdings. Late-trading, meanwhile, is an illegal practice where mutual fund shares are bought after 4 p.m. ET at stale prices that don't reflect after-hours news.

Regulators also are looking into allegations that a group of Bear brokers specialized in arranging market timing trades for a small cadre of wealthy hedge funds, including the now infamous Canary Capital Partners.

Canary is the defunct hedge fund run by Edward Stern that triggered the mutual fund investigation, after New York Attorney General Eliot Spitzer learned of its improper trading. Other brokers and hedge funds implicated in the trading scandal for whom Bear Stearns either cleared or processed trades include Empire Financial, Samaritan Asset Management, Kaplan Securities, Brean Murray, Ritchie Capital and Ilytat.

The three former brokers facing possible charges are Mark Hurant, Matthew Mills and Evan Greenberg. All three deny any wrongdoing, according to a copy of each person's broker registration statement. The SEC is considering bringing an administrative proceeding against Murphy, who also denies any wrongdoing.

A Bear spokesman was not immediately available for comment. Lawyers for the three brokers could not be reached for comment. Murphy was unavailable for comment.

Hurant, Mills and Greenberg were part of a group of brokers and clearing executives that Bear dismissed soon after the trading scandal broke in the autumn of 2003. Some on Wall Street saw the firings as an attempt by Bear to persuade regulators that the incidents of improper trading were not widespread and that the firm was moving aggressively to deal with the matter.

But in going after Murphy, the SEC is striking at the heart of Bear's clearing operation, which is one of the biggest on Wall Street. The firm's global clearing operation, which includes Bear's hedge fund prime brokerage business, accounts for 13% of the firm's net revenues.

One of Murphy's responsibilities is to supervise clearing executives who are responsible for handling the firm's relationships with the small brokerages that use Bear's trading platform, said people familiar with Bear.

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.

Bear's clearing operation is overseen by Richard Lindsey, a former SEC director of market regulation. Lindsey left the SEC to join Bear in 1999 to help the Wall Street firm clean up the mess from the A.R. Baron affair, another scandal involving the firm's clearing operation. In the Baron investigation, Bear paid a $38.5 million fine to settle charges that it let the defunct brokerage carry out stock manipulation over its clearing platform.

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