In August, the SEC and the New York County District Attorney's Office fined Bear Stearns 35 million dollars over the firm's role in clearing for defunct penny stock firm A.R. Baron. Bear Stearns settled without admitting guilt in the allegations of aiding and abetting A.R. Baron's fraud.
A.R. Baron was shut down in 1996 and its former President Andrew Bressman pled guilty to enterprise corruption and grand larceny in 1997. The New York County D.A.'s office had accused A.R. Baron of bilking investors of 75 million dollars.
Also in August, the SEC accused former Bear Stearns Clearing Corp. President Richard Harriton of playing a major role the A.R. Baron fraud. Harriton is contesting the charges.
The SEC claims Bear Stearn's relationship with A.R. Baron went "well beyond" a normal clearing arrangement and that Bear Stearns was involved "deeply in Baron's operations." Problems with A.R. Baron's business were numerous and well-known within Bear's clearing unit. For example, 80 percent of trades made near the close failed to settle--a strong indication of unauthorized trading. And Bear Stearns received up to 10 A.R. Baron customer complaints a day.
Bear's clearing staff on numerous occasions tried to end the association, the SEC says. But Harriton repeatedly took steps to keep Baron going, including charging Baron customers for trades he knew to be unauthorized, and extending credit to the correspondent firm when it faced net capital shortfalls. In fact, Harriton in 1995 twice called the NASD in an effort to keep A.R. Baron open, the SEC alleges.
The SEC's charging document against Harriton claims that Bressman offered him shares in A.R. Baron IPOs as an inducement to clear for the firm. Harriton allegedly told Bressman to contact Randolph Pace, former principal of penny stock firm Rooney Pace (also a former Bear Stearns clearing customer), to set up a nominee account. The SEC accuses Pace and Bressman of conspiring to "siphon profits from a planned Baron IPO for themselves and Harriton."
In a statement, Bear Stearns says, "On the most serious charges, [the firm] was technically 'a cause' of Baron's fraud on a negligence-based standard. Settling on this basis was in the company's best interest."
Harriton resigned from the firm when the settlement was announced. Richard Lindsey, who in March left his post as director of the SEC's division of market regulation to fill a newly created No. 2 spot at Bear Stearns Clearing Corp., was named co-president of the clearing unit. He shares duties with Michael Minikes, formerly senior managing director and treasurer of Bear Stearns.
