Bear Stearns Ousts Employees For Improper Fund Trades

April 1, 2004 ( - Three employees in Bear Stearns Cos clearing operations unit have been dismissed in connection with allegedly improper mutual fund trading.

Two of the employees that were dismissed included managing directors – Brendan Devan and Christopher Welsh.   The employees left as a result of their roles in alleged late-trading and market-timing trades by certain clients of the firm, the Wall Street Journal is reporting citing “people close to the matter.”

“We have completed a comprehensive internal review into these issues and have taken appropriate action. We are continuing to cooperate with all regulatory authorities,” a spokeswoman for Bear said in a statement according to the Journal report.

In addition to the three dismissals, a senior managing director in the unit, Michael Zackman, has taken a “voluntary leave,” according to the Journal report.   Martin Auerbach, Zackman’s attorney told the Journal that Zackman requested the leave of absence “to address an issue that was raised in the mutual-fund timing inquiry so he could put it to rest and return to devoting his full attention to his clients.”

The exits of the employees of Bear Stearns clearing unit comes as both the U.S. Securities and Exchange Commission (SEC) and the Justice Department are looking into the firm’s knowledge of alleged market-timing and late-trading transactions.   A number of officials with brokerages that cleared trades through Bear Stearns previously told that the firm’s trading platform accepted trades up until 6 p.m. and, in some cases, even later. These sources said any after-hour trades were supposed to be processed at the 4 p.m. closing price, but that the platform lent itself to abuse by late traders.

A suit filed last November against Bear Stearns has alleged that the firm knew its clearing customers were misusing the mutual fund trading platform to engage in late trading. Bear Stearns, the lawsuit contends, “generated substantial revenues and profits from participating in the illegal conduct.” Bear Stearns has denied the allegations

In large part, Bear Stearns’ alleged involvement in improper mutual fund may be due to the firm’s own success.   Because Bear Stearns was able to process fund trades within a day rather than the standard three days, regulators say its platform represented a market-timer’s dream (See  Bear Stearns Platform Could Be Market Timers’ Mecca ).   As New Jersey regulators were filing an enforcement action against PIMCO mutual funds, the officials said Bear Stearns platform was particularly “advantageous for market-timers”  (See  PIMCO Hit with Garden State Trading Suit ).   Bear Stearns though was not named in the PIMCO enforcement action.