Bear, Stearns & Co
Bear, Stearns & Co. is a global investment banking and brokerage firm. The company was founded in 1923 under the management of Joseph Ainslee Bear, Robert B. Stearns, and Harold C. Mayer. The company now employs roughly 10,500 individuals and holds over $30 billion in capital worldwide. The company recently paid two major fees, one to settle securities fraud charges filed against it in 1999, and another in 2002 to end investigations by the SEC and partnering regulatory entities.
1999 - Clearing Relations
On August 5, 1999 the Securities and Exchange Commission (SEC) issued a press release stating it had found that Bear Stearns "caused violations of the antifraud provisions of the federal securities laws in connection with its clearing relations with A.R. Baron & Co." The release further charged Bear Stearns's President, Richard Harriton, with "fraud," and "aiding and abetting Baron's fraud." Bear Stearns was fined $35 million ($30 million of which was set aside for investor restitution), and Harriton was later fined $1 million.
Bear Stearns performed clearing operations for A.R. Baron, the former brokerage firm that, on account of its fraudulent practices, had its broker/dealer registration revoked (October 1996). A clearing firm acts as an administrator for smaller firms, settling transactions, handling confirmations, and making sure that trades are executed within a set time span. According to the SEC, Bear Stearns, while operating as a clearing firm:
- Knowingly "charged unauthorized trades to Baron customers instead of to Baron"
- Directly withdrew money and securities from the accounts of Baron's customers to pay for unauthorized trades
- Refused to refund to Baron's customers money that had been withdrawn from their accounts to pay for unauthorized trades
- Intentionally kept Baron afloat financially by using funds from the accounts of its customers to hide its debt, and by supplying it with $1.6 million in working capital"
Richard Harriton, the former President of Bear Stearns, was banned from the securities industry in April, 2000 as part of the SEC settlement he agreed to. Harriton allegedly "directed Bear Stearns to take various actions to prop up Baron." According to the SEC's charges, Harriton knew of the fraudulent acts being committed by Baron, and continued to clear unauthorized trades. Further allegations against Harriton focused on a "nominee account" he was in the process of setting up with Baron's Principal, Andrew Bressman. Through the account, Harriton would have personally profited on Baron's IPOs. Harriton was required to pay $1 million to settle the charges. He did not admit to wrongdoing.
2002 - Federal Regulations
In December of 2002, Bear Stearns agreed to pay $80 million to end intense investigations that had focused on its compliance to rules set forth, predominantly, in the 1934 Securities Exchange Act. The company was one of ten investment banking firms to pay the "global" securities fraud settlement that totaled $1.4 billion. The settlement was finalized on April 28, 2003. Without admitting guilt to securities fraud, Bear Stearns settled general allegations of advising under conflict of interest, "spinning" IPO shares, and compromising the independence of research. The $80 million settlement will be split three ways; $50 million will go toward compensation for investors, $25 million will be used to establish independent research, and $5 million will fund investor education.
New York's Attorney General, Eliot Spitzer, a prime motivator in beginning the investigations, discussed the extent of the problems in an October 2002 interview with 60 minutes. He stated, "This was so pervasive on Wall Street, I believe, that nobody believed anybody was going to put a stop to it." He responded, when asked about the billion and a half he was suing the firms for, "These are ill-gotten gains that they never should have gotten." Asked if he could prove that, he said, "Oh, sure. Absolutely. We have evidence far beyond what is in the complaint that proves that the analysts generated false reports, the investment bankers brought in the business, the CEOs got the IPO allocations. Everybody won except the small investor."
An interview PBS conducted with Bear Stearns's research analyst Scott Ehrens in 2001 exposed how common it was for analysts to unblinkingly issue ratings that deviated from the content of their research reports. Ehrens claimed in the interview that he had issued negative reports on numerous companies. "I issued the lowest ratings we gave," he said. Ehrens's lowest rating, however, had been a 'neutral'. When PBS pressed him on if a 'neutral' was Bear Stearns's lowest rating, Ehrens responded by saying, "There's actually a lower rating at Bear Stearns. It's infrequently used. I think it's a 'sell'." When asked, "Why not give 'sell' recommendations on stocks, on companies that you think are overvalued," Ehrens explained that scale ratings were ineffective. He said, "I'd say, why look at ratings? Why the obsession with thinking that a rating represents the entirety of your point of view?...You have to read the whole report." Individual investors, however, relied upon the ratings of Ehrens and his peers.
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