The SEC, which is usually quiet about their investigations, has issued a statement indicating it has expanded an inquiry into Bear Sterns Cos. to include what was or wasn’t said in the two months leading up to the brokerage firm’s collapse.
The SEC’s enforcement division also wrote to J.P. Morgan Chase & Co., as it was negotiating to take over Bear Sterns, about their “investigations and potential future inquiries into conduct and statements by Bear Stearns before the public announcement of the transaction with J.P. Morgan.”
The SEC’s letter did not give J.P. Morgan any assurances that it won't bring a case against them. However, it is unlikely that the SEC would bring a case against J.P. Morgan because the firm didn't have access to Bear Stearns’ books and public statements to determine the adequacy of any statements but the SEC could still file civil charges against individuals.
Bear Sterns is already the focus of several civil and criminal investigations. The SEC and Justice Department are investigating Bear Sterns for the factors that led the collapse of its hedge fund last spring. The New York attorney general is also looking into Bear Sterns’ packaging and selling of mortgage-backed securities.
Lawyers say comments made by market participants and Bear Sterns executives may have sparked the SEC into looking for improper insider trading. The SEC could be looking at what traders were saying about Bear's liquidity and ability to stay in business. Prior to the Fed’s intervention, widely circulated rumors suggested Bear Sterns sold borrowed shares with the intention of profiting from a price decline before the firm was forced into a desperate rescue by pulling business from its prime brokerage. However, possible focus of the SEC’s expanded probe remains unclear and market-manipulation cases are hard to prove.
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