$250 million fine mutes 1Q profit at Bear Stearns

March 17, 2006|By WALTER HAMILTON | WALTER HAMILTON,LOS ANGELES TIMES

NEW YORK -- Bear Stearns Cos. Inc. yesterday became the third brokerage in as many days to post record first-quarter earnings and revenue, but the news was overshadowed by old problems - illegal market-timing practices that bilked mutual fund investors out of millions.

The New York Stock Exchange and Securities and Exchange Commission said yesterday that they fined Bear Stearns $250 million - nearly half of its first-quarter profit - for helping hedge funds and other customers to illegally trade mutual fund shares. It was the biggest settlement ever reached by the NYSE's regulatory arm. They alleged that from 1999 to 2003 Bear Stearns let hedge funds engage in late trading and market timing, twin practices where professional traders earn fast profits at the expense of long-term mutual fund shareholders.

Bear Stearns designed special systems to accommodate the trading, then helped hedge funds disguise their activities and circumvent restrictions that mutual funds put up to block them, according to regulators.

Hedge funds often pursue complex trading tactics in hopes of big returns for their clients, which include wealthy individuals and pension funds.

In some cases, hedge fund managers showed their appreciation to Bear Stearns by giving its employees tickets to sporting events and gift certificates to spas, the SEC said.

Bear Stearns neither admitted nor denied the charges, and it declined to comment on the settlement. It had announced the outline of the deal in December, saying then that it was in the "best interests" of shareholders and clients. Its shares dipped 94 cents yesterday to $133.27.

The settlement came the same day that Bear Stearns reported record first-quarter earnings of $514 million - more than double the amount of the settlement - on an 18.9 percent jump in revenue to $2.19 billion. The brokerage's earnings of $3.54 a share were 36 percent higher than the $379 million, or $2.64 a share, it earned a year ago.

Bear Stearns' earnings come after Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. posted record first-quarter income and revenue this week.

The settlement includes a $90 million fine and disgorgement of $160 million in ill-gotten gains. Restitution will go into a fund to be distributed to the harmed mutual funds and fund shareholders.

Late trading, which is illegal, involves the buying or selling of mutual fund shares after the stock market closes at 4 p.m. Eastern time, but still receiving the current-day price. Investors who enter fund orders after 4 p.m. are supposed to get the price that is effective at the next day's market close.

Market timing involves the rapid purchase and sale of mutual fund shares in hopes of profiting from short-term market swings. The practice is not illegal, but many fund companies had policies banning market timing because gains come at the expense of long-term shareholders.

Part of the evidence gathered by regulators came from taped phone conversations in which Bear Stearns employees pitched their late-trading or market-timing capabilities to customers.

In one call, a Bear Stearns employee told an outside broker, "We probably do the best clearance there is on the Street on market timing," adding that, "you have plenty of time to do trades ... pretty much a quarter to six, 5:45, to enter a trade."

Though Bear Stearns itself did no trading, it was nonetheless a linchpin for wrongdoing by others, regulators said.

Walter Hamilton writes for the Los Angeles Times. The Associated Press contributed to this article.

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