Securities and Exchange Commission
charges Thursday that the small New York brokerage placed thousands of abusive mutual fund trades for at least five hedge funds between 2001 and 2003.
The SEC contends that brokers at Brean engaged in both market-timing and late trading on behalf of their hedge fund customers, which included
Canary Capital Partners
. Brean will pay $150,000 to settle the enforcement action, according to an SEC administrative order.
The administrative order also places blame on the clearing firm that permitted the late trading to occur, saying it also violated federal securities laws because of Brean's wrongful trading. The order doesn't identify the clearing firm by name, but people familiar with the investigation say it is
In a civil lawsuit filed in September, two former Brean brokers alleged that a lawyer had given them faulty advice in telling them it was OK to engage in late trading through Bear's clearing platform. The two brokers, Ryan Goldberg and Michael Grady, who are still being investigated by the SEC and New York Attorney General Eliot Spitzer, claimed the lawyer had committed malpractice.
The brokers were not charged in the SEC action against Brean. In the civil lawsuit, Goldberg and Grady identified Canary,
Veras Investment Partners
, formerly called Trout Trading, as their customers.
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 is the buying or selling of mutual fund shares after their 4 p.m. closing price, in order to take advantage of late-breaking or market-moving news. Regulators and prosecutors say late trading is an illegal practice, and a number of offenders are facing criminal charges.
The SEC notified Bear last June that it is considering filing civil charges against the firm's big clearing operation. Regulators believe Bear processed and financed abusive mutual fund trades for dozens of hedge funds and small brokerages.
Earlier this week,
reported that the SEC recently notified three former Bear brokers and Peter R. Murphy, a senior managing director, that they too could face civil charges for assisting hedge funds engaged in abusive trading of mutual fund shares. Murphy is one of the highest-ranking executives in Bear's big clearing and operations division.
reported that Vincent Dicks, a top manager in Bear's private client group, also received a so-called Wells notice from the SEC.
also reported the SEC was on the verge of settling with Brean.
People familiar with the investigation say at least one other current Bear employee has been informed he could be facing a possible enforcement action and additional Wells notices may be forthcoming.
A Bear spokeswoman said the brokerage has been cooperating with the SEC.
"Bear Stearns has taken significant action since the onset of the industrywide mutual fund investigation," said the spokeswoman, Elizabeth Ventura. "Under the auspices of the audit committee of the board of directors, we conducted an in-depth internal review of mutual fund trading practices. As a result of this internal review, we took swift and decisive disciplinary action -- including the termination of certain employees -- and, we proactively shared the information from this thorough review with the SEC."
SEC officials declined to comment.
Late last year, Bear increased its litigation reserve by about $100 million to cover the cost of a potential settlement with securities regulators over the firm's alleged involvement in the mutual fund trading scandal.
Harold McGuire, Brean's attorney and a partner with Entwistle & Cappucci, said his client is "very happy'' to put the matter behind it.
"The fact of the matter is there isn't anyone left at Brean Murray who has significant knowledge of these activities,'' he said.