Bear Stearns Settles Market Timing Charges

by Glen Shapiro, LawAndTax-News.com, New York

22 March 2006

It emerged last week that the SEC enforcement action against Bear, Stearns & Co., Inc. (BS&Co.) and Bear, Stearns Securities Corp. (BSSC) (collectively, Bear Stearns), charging the organisation with securities fraud for facilitating unlawful late trading and deceptive market timing of mutual funds by its customers and customers of its introducing brokers, has been settled.

The Securities and Exchange Commission issued an Order finding that from 1999 through September 2003, Bear Stearns provided technology, advice and deceptive devices that enabled its market timing customers and introducing brokers to late trade and to evade detection by mutual funds.

According to the SEC, in 1999, BSSC established a "timing desk" to manage the increasing flow of market timing trades through BSSC. The timing desk assisted customers to enter late trades and even to cancel unprofitable trades the following day. The timing desk also advised customers and brokers on how to evade the blocks and restrictions imposed by the mutual funds and how to negotiate BSSC's own blocking system.

Some market timers expressed their appreciation for this assistance by giving timing desk employees gifts such as spa gift certificates, event tickets and meals.

Under the terms of the settlement, Bear Stearns will pay $250 million, consisting of $160 million in disgorgement and a $90 million penalty. The money will be paid into a Fair Fund to be distributed to the harmed mutual funds and mutual fund shareholders.

Bear Stearns will also undertake significant reforms to improve its compliance structure.

Simultaneously, NYSE Regulation, Inc. censured and fined Bear Stearns, and imposed compliance with these undertakings. The fine imposed by the NYSE will be deemed satisfied by the payment of the $250 million pursuant to the Commission's Order.

Linda Chatman Thomsen, SEC Enforcement Division Director, observed that:

"For years, Bear Stearns helped favored hedge fund customers evade the systems and rules designed to protect long-term mutual fund investors from the harm of market timing and late trading. As a result, market timers profited while long term investors lost. This settlement will not only deprive Bear Stearns of the gains it reaped by its conduct, but also require Bear Stearns to put in place procedures to prevent similar misconduct from recurring."

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