Regulators looking into

Bear Stearns'


role in the mutual fund trading scandal are considering bringing an enforcement action against a second top executive in the firm's securities clearing operation.


Securities and Exchange Commission

has notified Michael Zackman, a Bear Stearns senior managing director, that he could face civil charges for assisting hedge funds and brokers engaged in abusive trading of mutual fund shares. The SEC's New York office, which is heading up the 16-month-old investigation, notified Zackman of its intentions last month, according to a copy of his broker registration statement obtained by


Zackman, responsible for overseeing Bear's relationships with the hundreds of small brokerages that clear stock trades through the firm, has been on a leave of absence for nearly a year. On his registration statement, Zackman said "there is no basis for the SEC to bring a proceeding against him in this matter."

Martin Auerbach, Zackman's attorney, could not be reached for comment.

reported last week that Peter R. Murphy, another senior managing director and one of the highest-ranking executives in the clearing division, also received a so-called Wells Notice from the SEC. Murphy, who also denies doing anything wrong, remains in his current post.

In all, at least six current and former Bear employees are facing potential civil charges in the investigation, including Vincent Dicks, a top manager in Bear's private client group. People familiar with the investigation say regulators are continuing to investigate the matter and additional Wells notices against other employees may be soon forthcoming.

The looming regulatory actions against the employees come nearly seven months after the SEC first notified Bear that it is considering bringing a civil action against the firm and its large clearing subsidiary. Late last year, the firm increased its litigation reserve by about $100 million to cover the cost of a potential settlement with securities regulators.

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.

Bear spokeswoman Elizabeth Ventura declined to comment on the SEC investigation of Zackman. Last week, Bear, broadly commenting on the SEC inquiry, said it "conducted an in-depth internal review of mutual fund trading practices'' and "took swift and decisive disciplinary action -- including the termination of certain employees."

In going after Murphy and Zackman 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.

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.