The SEC hit Bear Stearns with a $250 million penalty for securities fraud for facilitating market-timing and late trading for certain institutional customers to the detriment of others.
“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,” says Linda Chatman Thomsen, SEC enforcement director. “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,” she says. In settling the findings, Bear Stearns neither admits nor denies the findings.
The Commission’s investigation found that from 1999 through September 2003, the firm provided technology, advice and deceptive devices that helped market timers and late traders evade the firm’s own systems as well as those of mutual funds.
For instance, in 1999, the firm’s clearing operation, Bear, Stearns Securities Corp (BSSC), set up a “timing desk” to manage the large number of market timing trades and help institutional customers and brokers evade compliance measures at BSSC and the mutual funds. Market timing customers even gave timing desk employees gifts for their help, including spa gift certificates, event tickets and meals.
Introducing brokers and hedge fund customers were also given direct access to Bear’s mutual fund order entry system, allowing them to enter and process trades as late as 5:45 p.m., even if they had been received long after the 4 p.m. deadline. Bear Stearns employees were tape-recorded touting the firm’s market timing and late trading capabilities.
Meanwhile, the firm received “thousands of letters or emails” from mutual funds, according to the SEC release, complaining about the abusive trading or requesting it be put to an end. However, the blocking system the firm developed in response to the complaints could only stop identified accounts from continuing the abuse, allowing timers to simply open new accounts in order to continue trading. According to the release, only when a fund company threatened to pull its business completely did Bear Stearns put a stop to all market timing in the fund.
Per the settlement, the $250 million will be distributed to affected customers by an independent consultant. Bear’s compliance policies and procedures for supervising prime brokerage, clearing and mutual fund transactions will be reviewed by an independent consultant. In addition, a Compliance Hotline will be established whereby employees can anonymously obtain answers to compliance questions or report questionable conduct.
