Wall Street & Technology: Blog: Regulator Probes Bear Stearns

Regulator Probes Bear Stearns

Bear Stearns is being investigated by Massachusetts securities regulators over whether the brokerage improperly traded with two in-house hedge funds that collapsed last summer, burdening investors with added losses.

The Wall Street Journal reported that regulators in the office of Secretary of State William Galvin are specifically trying to determine whether the bank traded mortgage-backed securities for its own account with the hedge funds without notifying the fund's independent directors in advance.

Massachusetts claims jurisdiction because some residents invested in the Bear Stearns High-Grade Structured Credit Strategies Fund and the High-Grade Structured Credit Enhanced Leverage Fund, both of which collapsed last summer leaving losses of $1.6 billion, the paper said.

Investigators are also seeking to determine if some troubled securities traded by the brokerage were offloaded into the hedge funds and whether they were priced properly.

Currently, federal prosecutors and the Securities and Exchange Commission (SEC) are each examining the circumstances surrounding the Bear Stearns funds' collapse. The Wall Street Journal said the Massachusetts investigation appears to be the first suggestion that potential conflicted trading at Bear Stearns is being scrutinized.

There are now some 9,500 hedge funds, with total assets of about $1.4 trillion, which are usually exempt from any direct regulation by the SEC, NASD and other regulatory bodies.

But given the size of hedge fund assets and their substantial sway over markets, there is a continuing debate over whether further regulation is required.

Over a year ago, the SEC established a hedge-fund working group in its enforcement division to look specifically at insider trading.

The agency also recently targeted the hedge fund industry with an anti-fraud rule making it easier to sue money managers who lie about investing strategies, performance, experience and risk.

This week, the SEC sued a New York hedge fund and its principal for making $1.48 million in profits from illegal trading.

Posted by Melanie Rodier at 03:39 PM

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