Bear Stearns is drawing the attention of the Justice Department for the role it played in allowing hedge funds to arbitrage mutual funds. TheStreet.com reported Wednesday that U.S. Attorney James Comey has assigned a senior prosecutor in the securities fraud division to oversee the inquiry. The report is based on unnamed sources familiar with the investigation.
Eliot Spitzer's investigators in the New York Attorney General's office are deferring to the U.S. Attorney's office in the case, according to the report.
Bear Stearns indirectly confirmed that the U.S. Attorney is looking into its practices when it filed paperwork with the NASD for four fired brokers that cited a probe.
The possible role of Bear Stearns in the fund scandal came to light when investigators learned that two Florida broker-dealers -- Kaplan Securities and Empire Financial Holding -- used Bear Stearns to clear their trades. Meanwhile, Bear Stearns fired six employees from its private client group last week. TheStreet.com reports that those employees may have helped hedge fund trade shares of mutual funds through Bear Stearns.
The report also cites a lawsuit filed in Manhattan federal court that claims Bear Stearns oversaw an "electronic routing system" used by hedge funds and small broker-dealers to trade shares of mutual funds.
In each of these cases it is believed that the hedge funds were allowed to quick-trade funds through Bear Stearns clearing services. There are no reports that any Bear Stearns employees allowed hedge funds to place illegal late trades. However, the article cites sources that say that investigators believe some late trading may have taken place.
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