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SEC hunts illegal trades in Bear case

Date: Friday, April 4, 2008
Author: Ben White and James Politi, Financial Times

US securities regulators are trying to determine whether illegal trading and rumour mongering took place in the days leading up to the emergency sale of Bear Stearns to JP-Morgan Chase, the chairman of the Securities and Exchange Commission said yesterday.

Chris Cox, SEC chairman, told the Senate banking committee that enforcement officials were taking a "very active" look at the trading of securities tied to Bear in the days before the sale.

He said rumours circulating about the bank were "too big to miss".

Answering a question about the SEC's response to allegations of abusive trading, Mr Cox said: "Your hopes will be, I think, met and exceeded, with respect to the agencies' response to these concerns."

JPMorgan agreed on March 16 to buy Bear for $2 a share in a federally back-ed deal to save the investment bank from collapsing into bankruptcy. JPMorgan later raised its offer to $10 a share.

Bear executives have suggested privately that hedge funds colluded to spread rumours about the bank to try to drive down its share price and force it into bankruptcy.

These executives contend that unfounded rumours about Bear's liquidity, more than any legitimate problems, led trading counter-parties, clients and creditors to abandon the bank, driving it to the brink of failure.

Alan Schwartz, Bear chief executive, yesterday publicly articulated that belief in testimony before a Senate banking committee hearing called to examine events surrounding the sale and the Federal Reserve's agreement to take responsibility for $29bn worth of Bear's more illiquid assets.

"It looked like more than just fear.

"It looked like there were people that wanted to induce a panic," Mr Schwartz said.

Jamie Dimon, JPMorgan chief executive, said there was "enough smoke" surrounding trades in Bear securities to warrant a close look by regulators.

Executives at Lehman Brothers have also forwarded information at the SEC's request about possible abusive short-selling of the bank's shares following Bear's collapse.

Allegations of collusion by hedge funds are notoriously difficult to prove because the funds can claim they acted independently on the honest belief that their target's shares were overvalued.

Mr Cox yesterday said that the Federal Reserve had passed on "extremely helpful information" about trading in Bear securities from various market sources.

In other remarks yesterday, Mr Schwartz said Bear might have survived if the Fed had moved more quickly to give investment banks access to funds previously reserved for commercial banks.

"I do believe that if as a policy measure the discount window had been open to investment banks for their high-quality collateral, I think it's highly, highly unlikely in my personal opinion that we'd be in the position that we find ourselves in today."

* JPMorgan Chase says it has bought 11.5m Bear Stearns shares in the open market, increasing its stake to 44.9 per cent upon closing of its share exchange agreement, reports AP .

In a filing with the SEC, JPMorgan said it bought the shares on March 24 for $140.7m. The bank owns about 13m shares, including shares and call options owned by its affiliates, or an 8.9 per cent stake based on 145.7m Bear Stearns shares outstanding.