Updated from 11:12 a.m. EDT
, the 81-year-old brokerage whose massive clearing operation provides a crucial backbone for Wall Street, is on the verge of being charged by government investigators with helping to facilitate the illicit strategies at the heart of the mutual fund trading scandal.
Bear Stearns said Wednesday that regulators in the
Securities and Exchange Commission's
New York office are considering a civil action or cease-and-desist order against the firm and its clearing subsidiary. Bear would be the first major Wall Street brokerage to be sanctioned in the nearly year-old mutual fund scandal.
The company currently is in talks with regulators about a possible settlement, but no deal is imminent, people with knowledge of the situation told
. A Bear Stearns spokeswoman could not be reached for comment.
The SEC's interest in Bear was the subject of a series of stories on this Web site, including
the first word of the investigation, articles chronicling
investigators' interest in an operations manager whose office directed traffic in the clearing unit, and the
role of Bear employees informally known as the "timing group" in facilitating abusive trading strategies.
Bear Stearns said it is cooperating with regulators. The firm says the SEC action could result in a disgorgement of profits, civil monetary penalties and other sanctions.
In a conference call with analysts, Bear Stearns Chief Financial Officer Samuel Molinaro said: "This is the next step in moving this process to some completion."
In early trading, shares of Bear Stearns were up $1.18, or 1.5%, to $80.61, as investors mainly focused on a robust second-quarter earnings report.
For Bear -- which paid a $38.5 million fine five years ago to settle charges that defunct brokerage A.R. Baron carried out stock manipulation over its clearing platform -- the screws began to tighten last month with word the SEC notified
that it was planning to file civil charges against it. Empire, a small Florida brokerage that cleared and processed its mutual fund trades through Bear Stearns, is said to have been one of the most aggressive firms in providing a trading platform for abusive traders.
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.
Bear's disclosure was contained in the company's earnings release, which showed net income rising more than 20% to $347.8 million, or $2.49 a share, in the second quarter from $280.4 million, or $2.05 a share, last year. Revenue jumped 17.8% to $1.7 billion.
Analysts had been forecasting earnings of $2.23 a share on revenue of $1.60 billion. The strong earnings from Bear Stearns comes on the heels of an equally impressive second-quarter earnings report from
Among segments, revenue in Bear's capital markets division rose 14.7% to $1.35 billion, while revenue in global clearing rose 19.4% to $223.7 million, and revenue in wealth management surged 41.9% to $176.5 million. The gain in capital markets reflected a 33.1% rise in institutional equities revenue to $252 million; a 10.4% rise in fixed-income revenue to $844.4 million; and a 14.1% rise in investment banking revenue to $254.9 million.
On the expense side, compensation as a percentage of net revenue was 49.9% in the second quarter, compared with 47.3% in the year-ago quarter. Noncompensation expense was $352 million in the quarter, up 2.7% from a year ago, primarily reflecting the consolidation of the results of Bear Wagner Specialists, which became a majority owned subsidiary when partner John Mulheren died last December.