The Securities and Exchange Commission enforcement staff has notified Bear, Stearns & Co. that they may recommend the SEC file charges against the firm as a result of an investigation of alleged anticompetitive bidding practices in municipal derivatives and investment products.
Bear Stearns disclosed the SEC warning in the 10-Q quarterly financial statement it filed with the SEC late Monday.
"In February 2008, Bear Stearns received a 'Wells Notice' advising that the SEC staff is considering recommending that the SEC bring a civil injunctive action and/or an administrative proceeding in connection with the bidding for various financial instruments associated with municipal securities," the firm said in the filing. "Bear Stearns understands that it will have an opportunity to respond to the Wells Notice and to discuss the matter with the staff before any recommendation is made to the commission."
Wells notices typically give firms the opportunity to respond in writing or verbally to SEC staff over a certain period of time.
Bear joins several other firms that have disclosed they have received such notices, including Bank of America Corp., Financial Security Assurance Holdings Ltd, whose parent is Dexia SA, and UBS Securities LLC.
In addition, at least one current and one former employee of Bear Stearns - Stephen Salvadore and Patrick L. Marsh - each disclosed in recent regulatory filings that they received letters from the Justice Department stating that they are a "target" of a grand jury investigation in Manhattan. But they each denied that they engaged in any wrongdoing. Salvadore is a senior managing director and manager of municipal capital markets derivatives and investments at Bear Stearns.
Marsh is managing director and head of muni structuring, which includes derivatives, at Deutsche Bank, but formerly worked at Bear Stearns.
The notices are believed to be part of one of the largest investigations ever of the municipal market. The Justice Department and the SEC are conducting parallel criminal and civil probes of anticompetitive bidding and other practices in muni transactions involving investments and derivatives done over the past seven to 15 years.
The Justice Department probe, which is being headed by its antitrust lawyers, first came to light in November 2006 after the department and Federal Bureau of Investigation raided three investment advisory firms - CDR Financial Products in Beverly Hills, Calif., Investment Management Advisory Group Inc., in Pottstown, Pa., and Sound Capital Management in Eden Prairie, Minn.
Bank of America announced in February 2007 that it had reached an amnesty agreement with the Justice Department in its criminal antitrust probe. Under the agreement, the bank promised to fully cooperate with the department and share information related to the muni investigation in return for protection against criminal prosecution for any of the alleged abuses uncovered from the information. The agreement does not protect the bank from civil charges.
