Bear Stearns

(BSC)

is the second big securities firm to defy predictions that the second quarter would be a glum one for Wall Street, by reporting a 5% gain in profits.

Most analysts were expecting Bear to report a modest decline in earnings due to a drop in trading revenue. But just like

Lehman Brothers

(LEH)

, which on Tuesday reported better-than-expected earnings, Bear left the experts with egg on their faces Wednesday.

In the quarter, Bear earned $365 million, or $2.56 a share, compared with $347 million, or $2.49 a share, a year ago. Net revenue rose 9% to $1.9 billion.

Analysts, as surveyed by Thomson Financial, had predicted Bear would earn $2.37 a share and generate $1.7 billion in revenue.

Shares of Bear were gaining 2% in premarket trading.

"Bear Stearns produced excellent results for the second quarter and record results for the first half of 2005," said James Cayne, the firm's chairman and CEO, in a prepared statement.

Revenue from trading for customers and the firm's own account rose 5% to $980 million. The biggest gain in revenue was the 139% jump in interest and dividends to $1.2 billion. The surge in interest revenue is an indication that Bear's customers, including hedge funds, are borrowing more money to buy and short stocks.

The gain in earnings was fueled by strong revenue gains from the firm's institutional equities group and its big global clearing group, which includes Bear's hedge fund business. The gains in those areas offset some surprising weakness in revenue from the fixed income business, which fell 6% to $808 million.

In the quarter, net revenue from institutional equities rose 59% to $390 million. The gains reflected an increase in institutional trading of equity derivatives and gains on investments made by Bear.

Net revenue from global clearing rose 17% to $276 million, largely because of increased stock borrowing by hedge funds and customers of the hundreds of small brokerages that process their stock trades through Bear.

"The strength of our Global Clearing Services Division was evident in its consistent and meaningful contribution to earnings," said Cayne in the statement.

In the earnings release, Bear made no mention of a major

Securities and Exchange Commission

investigation that has engulfed the clearing division.

TheStreet.com

previously reported that the SEC, in a closed-door session on May 25, voted to file formal charges against Bear because of the role its clearing arm played in the mutual fund trading scandal.

Bear, which last year set aside $100 million to resolve the litigation, has said little about the investigation since. Bear and the SEC are believed to be in negotiations aimed at resolving the matter since the SEC vote.

Up until this point, Bear has been reluctant to settle the matter because the SEC is demanding some rather stiff sanctions, which includes a big fine and a demand that Bear sell all or part of its stock-clearing operation. To put pressure on Bear, the SEC has sent a preliminary notification to eight current and former Bear employees, including four senior managing directors, that they too could face civil charges.

Bear's stock-clearing business is one of the biggest on Wall Street.

The strong earnings from Bear and Lehman are indications that the earlier warnings from

J.P. Morgan Chase

(JPM) - Get Report

and

Morgan Stanley

(MWD)

of a trading slump may not be an industrywide event.

The better-than-expected reports from Bear and Lehman put pressure on

Goldman Sachs

(GS) - Get Report

, often seen as the premier Wall Street firm, to match those numbers when it reports on Thursday.