A top executive with
clearing division was asked to provide a statement to
New York Stock Exchange
investigators examining the firm's role processing trades for clients who have been implicated in the mutual fund trading scandal.
In March, regulators at the Big Board notified Ronald Suber, a Bear Stearns senior managing director, that they wanted a statement from him. Suber, who works in the firm's San Francisco office and is in charge of sales for the clearing division, recently disclosed the NYSE's interest on his brokerage registration statement.
It couldn't be determined whether Suber, who referred a telephone call to Bear Stearns' corporate communications office, was ever questioned. A Bear Stearns spokeswoman could not be reached for comment.
Suber is one of the highest-ranking executives in Bear Stearns' clearing group, which is led by Richard Lindsey. Suber oversees a nationwide sales force that forges relationships with small brokerage firms and hedge funds that use Bear Stearns to clear trades for them, as well as provide back-office services.
The Big Board's investigation is similar to probes being conducted by the
Securities and Exchange Commission
and federal prosecutors in New York. It's not unusual for self-regulatory industry organizations like the NYSE to piggyback onto investigations led by federal authorities in order to gain evidence to determine whether they should strip a person of his brokerage license.
Bear Stearns' stock-clearing and trade-processing operation -- one of the largest on Wall Street -- is under the microscope of securities regulators and federal prosecutors for its role as a conduit between the mutual fund families and dozens of small brokerages and hedge funds that have been implicated in the far-reaching trading scandal. Investigators are trying to determine whether Bear Stearns may have aided and abetted abusive trading, either passively or actively.
Market timing, or frequent trading of mutual fund shares, is technically a legal trading strategy. But it is prohibited under most mutual fund prospectuses because it can dilute the value of a portfolio's holdings. Late-trading, meanwhile, is an illegal practice where mutual fund shares are bought after 4 p.m. EDT at stale prices that don't reflect after-hours news.
Earlier this week,
reported that securities regulators are looking at a clerical team supervised by James Delvecchio, the head of operations in Bear's mutual fund clearing unit. People familiar with the investigation say Delvecchio would be in a better position than most at Bear Stearns to know what the firm did or didn't do about abusive trading, because all the mutual fund trading tickets submitted to the firm's clearing desk passed through his team.
Clearing is an arcane but crucial service on Wall Street in 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 that lack the financial resources and back-office muscle to make sure big sales of securities go off smoothly.
At Bear Stearns, clearing operations accounted for 13% of the firm's net revenue in 2003.
Some on Suber's sales force also helped arrange financing deals for the firm's hedge fund customers, enabling the funds to use borrowed money to make big market bets. Sources say regulators are also looking into offshore financing and margin deals Bear Stearns allegedly arranged for its hedge fund customers.
A class action lawsuit filed in November by mutual fund investors who claim Bear Stearns actively marketed its clearing platform to big-time market timers also alleges the Wall Street firm provided timers with offshore financing in order to circumvent federal regulations on margin investing. In the pending lawsuit, the plaintiffs contend Bear Stearns provided the financing to "encourage market timing activities" and "generate additional commissions."
Bear Stearns, in a regulatory filing, has denied the allegations in the lawsuit.
The NYSE also sought a statement from Brendan Devane, a former Bear Stearns managing director who worked in the same San Francisco office as Suber. Bear Stearns fired Devane on Feb. 11 for failing to "follow firm policy" on mutual fund trading, according to a copy of Devane's brokerage registration statement. Devane's registration statement described him as a "senior relationship manager."
Devane could not be reached for comment. He is one of several clearing executives Bear Stearns has forced out in the midst of the investigation. Last December, Bear Stearns fired four brokers, including their supervisor, for allegedly being involved in improper market timing activities. Lawyers for the brokers have denied their clients did anything improper.
In fact, Mark Hurant, the former supervisor, defended the actions of his brokerage team on his brokerage registration statement. On the form, Hurant said all of the group's trades "were approved by compliance, accounting and legal at Bear Stearns & Co."
Hurant also wrote that all of his group's trades were faxed each day before 4 p.m. to the firm's "mutual fund department," an apparent reference to the clerical team headed by Delvecchio.