Report: Spitzer Probing Bear Stearns on CDO Value Complaint

July 14, 2005 ( - New York Attorney General Eliot Spitzer is apparently investigating whether Bear Stearns gave inaccurate bond pricing information to an institutional customer, Reuters reported.

Bear Stearns revealed in a regulatory filing that Spitzer subpoenaed the bank for information on $16 million of a type of bond known as collateralized debt obligations (CDO) purchased by a client. According to an unnamed Reuters source, the unidentified institutional investor complained when the investor tried to sell the securities to Bear Stearns and learned that the CDOs were worth much less than the investment bank previously indicated.

Bear Stearns also said this week that staff of the US Securities and Exchange Commission (SEC) was recommending civil action against the bank for its pricing of $62.9 million of CDOs.

The securities can be complicated and an investor that buys a CDO from a bank often relies on the bank for regular information about whether the securities’ value has declined, Reuters said.   But the market may include investors that do not fully understand the risks involved, portfolio managers said.

Valuing CDOs can be tricky because some trade infrequently and portfolios collateralizing the notes can change over time, the report said.