Bear Stearns: Massachusetts Accuses Firm of Fraud in Mortgage-Backed Securities Trades
On November 15, 2007, Jennifer Levitz and Kate Kelly reported in the Wall Street Journal that the Commonwealth of Massachusetts filed an administrative complaint against Bear Stearns accusing the firm of fraud for improperly trading mortgage-backed securities with the two internal hedge funds – the Bear Stearns High-Grade Structured Credit Strategies Fund and the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund – that collapsed this past summer. Secretary of State William F. Galvin’s office says that Bear employees made hundreds of principal trades for the firm’s own account with the hedge funds without giving the funds’ independent directors the required advance notice.
Under the federal securities laws, financial firms that engage in principal trades with affiliated funds must notify the funds’ investment advisors in advance of the trading. According to the Bear funds’ offering documents, the approval of two independent directors was required before the entities could trade with Bear to ensure fair prices.
The administrative complaint alleges that 47% of the principal trades conducted by one of the funds between 2003 and 2006 did not secure the necessary approval. The current independent directors of the two funds, both executives at Walkers SPV Ltd., a fund administrator in the Cayman Islands where both funds were incorporated, refused to respond to a subpoena from Massachusetts seeking information about potential conflicted trades.
Bear declined to comment for the article.
