A complaint from a New Jersey bank prompted the newly disclosed investigation into

Bear Stearns'


derivatives pricing.

The big Wall Street firm said late Monday that it has received a subpoena from New York Attorney General Eliot Spitzer over the sale of $16 million of collateralized debt obligations, sophisticated securities backed by a portfolio of junk bonds, loans, derivatives and other assets.

A person familiar with the investigation says the customer that purchased the CDOs was a New Jersey bank. The bank, which the source declined to identify, recently alerted Spitzer's office to an apparent discrepancy in the valuations Bear Stearns was providing for the securities.

The investigation by Spitzer's office appears to be in its early stages. But it is related to an investigation by the

Securities and Exchange Commission

into the sale of $63 million of CDOs by Bear Stearns. That probe was also disclosed in Monday's filing.

Regarding the SEC inquiry, Bear Stearns said it could face potential regulatory action. The Wall Street firm said the investigation by regulators in the SEC's Miami office is focusing on "the pricing, valuation and analysis" of the CDOs.

Companies, in particular banks, issue CDOs in order to convert illiquid investments into cash, or move assets and liabilities off their balance sheets. Bear Stearns, in its regulatory filings, says it "acts as portfolio manager and/or underwriter in several collateralized debt obligation transactions.''

For investors, the attraction of a CDO is the promise of buying a security that offers a steady revenue stream that's drawn from a diverse group of assets. Hedge funds and financial services firms are some of the biggest buyers of CDOs. Investors can buy pieces, or tranches, of CDOs.

CDOs are one of the fastest growing segments of the market for so-called structured finance investments. But some critics worry that regulators have not focused enough attention on CDOs, since investors have little ability to independently verify the value of the assets in the underlying portfolio.

It's not clear whether the CDOs being investigated by Spitzer's office are the same securities that are the subject of the SEC inquiry.

A Bear Stearns spokesman declined to comment.

Bear Stearns disclosed the CDO investigations at the same time it was setting aside an additional $100 million to cover the cost of a possible settlement in the mutual fund scandal. To date, Bear Stearns has earmarked at least $200 million to pay for a possible settlement with the SEC.

Last month the SEC voted to bring an enforcement action against the firm because of its alleged role in processing and financing abusive mutual fund trades for numerous hedge funds and small brokers. The SEC and Bear Stearns have been involved in heated negotiations ever since.

But sources say a settlement in the mutual fund scandal is not imminent. The parties are still debating the ultimate size of the penalty and the fate of nine current and former Bear Stearns employees facing potential regulatory action by the SEC.