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Bear Stearns Background Information

The Bear Stearns Companies, Inc. (NYSE: BSC) is the parent company of Bear, Stearns & Co. Inc., one of the worlds largest financial firms. According to Institutional Investor magazine, Bear Stearns is the seventh largest U.S. securities firm in total capital, $71.8 billion (Feb. 2007), with total assets of $334.8 billion. In 2006, based on net revenue contribution, the firms profits are mainly derived through three units: capital markets (equities, fixed income, investment banking; just under 80%), global clearing services (12%) and wealth management (under 10%). Its headquarters are in Manhattan and it currently employs over 13,500 persons worldwide.

Bear Stearns was founded in 1923. It is one of the few investment banks that has remained independent and not merged with other financial institutions throughout its history. The company’s operations include corporate finance, mergers and acquisitions, institutional equities and fixed income sales, trading and research, private client services, derivatives, foreign exchange and futures sales and trading, asset management and custody services.

Bear Stearns’ brokerage unit has registered representatives handling investments for individuals and institutions. Additionally, Bear, Stearns Securities Corp. (BSSC), offers global clearing services to other broker dealers, prime broker clients and professional traders. As a “clearing” firm, BSSC handles the “back office” functions for hundreds of smaller correspondent or “introducing” brokerage firms.

Through their registered representatives introducing brokerage firms open accounts for their clients at BSSC, which handles orders, deposits, withdrawals and accounting functions in the investors’ account. The role of the introducing firm and its representatives is to advise the clients and obtain orders for securities. They then direct transactions through their clients’ accounts at BSSC.

While sales commissions are the primary goal of the introducing firm, BSSC earns only a small amount on trades and other services. The lion’s share of its earnings are from interest on margin accounts. BSSC can borrow money at very low rates, then lend funds to investors at several points over “broker call” or “prime” rates. Since BSSC requires investors to keep 150% to 200% collateral in liquid securities at any time, and immediately sell if they perceive any danger of loss, few loses occur in such margin loans. When losses do occur, BSSC can seize “net capital” deposits required by regulators to be maintained at BSCC by the introducing firm and/or sue the investor.

Additional Information on Bear Stearns
Bear Stearns Fined $250 Million for Late Trading

The SEC fined Bear Stearns $250 million for securities fraud for facilitating market-timing and late trading for certain institutional customers to the detriment of others.

“For years, Bear Stearns helped favored hedge fund customers evade the systems and rules designed to protect other mutual fund investors from the harm of market timing and late trading,” says Linda Thomsen, SEC enforcement director. “As a result, market timers profited while long-term investors lost. This settlement will not only deprive Bear Stearns of the gains it reaped by its conduct, but also require Bear Stearns to put in place procedures to prevent similar misconduct from recurring,” she says. Bear Stearns neither admits nor denies the findings.

The Commission’s investigation found that for years Bear Stearns provided technology, advice and deceptive devices that helped market timers and late traders evade the firm’s own systems as well as those of mutual funds. In 1999, the firm’s clearing operation, Bear, Stearns Securities Corp (BSSC), even set up a “timing desk” to manage the large number of market timing trades and help institutional customers and brokers evade compliance measures by BSSC and the mutual funds. Market timing customers gave timing desk employees gifts for their help, including spa gift certificates, event tickets and meals.

Introducing brokers and hedge fund customers were also given direct access to Bear’s mutual fund order entry system, allowing them to enter and process trades as late as 5:45 p.m., even if received long after the 4 p.m. deadline. Bear Stearns employees were tape-recorded touting the firms market timing and late trading capabilities.

Bear Stearns apparently ignored “thousands of letters or emails” from mutual funds, according to the SEC release, complaining about the abusive trading or requesting it be put to an end. Rather than heed the warnings, according to the SEC release, only when a fund company threatened to pull its business completely did Bear Stearns put a stop to market timing in the fund.

Bear Stearns to Pay $160 Mil. In Hedge Fund Case

Bear Stearns was ordered to pay up to $160 million to the estate of a failed hedge fund client after a bankruptcy court judge ruled the bank failed to police fraudulent money transfers in the fund in the months before its collapse.

The former head of the Manhattan Investment Fund is a convicted felon who was previously charged by regulators for using Manhattan Fund to perpetuate a fraud.

The U.S. bankruptcy court Judge said in an opinion in January that Bear Stearns suspected the fraud but didn’t stop 18 transfers totaling $141.5 million allowing short selling stocks to continue until the fund collapsed a few months later.

Bear Stears made $2.4 million in prime broker fees from its work with Manhattan Fund. It is appealing the decision.

Bear Stearns, along with Goldman Sachs and Morgan Stanley, control 80% of the prime brokerage market, a lucrative and thriving business that is little-understood beyond Wall Street. Prime brokers not only facilitate transactions for hedge funds, they finance the trades, lend stock to funds for trading strategies, advise funds and even act as counter-parties. The business is estimated to bring in $10 billion in revenues annually.

Shepherd Smith Edwards & Kantas LTD LLP Provides Legal Counsel in Claims Against Bear Staerns
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Our law firm represents institutional and individual investors nationwide with significant losses in their portfolios, retirement plans or investment accounts. Our attorneys and staff have more than 100 years of combined experience in the securities industry and in securities law. Several of our lawyers served for years as Vice President or Compliance Officer of brokerage firms.

Each lawyer and staff member of our firm is devoted to assisting investors to recover losses caused by unsuitability, over-concentration, fraud, misrepresentation, self-dealing, unauthorized trades or other wrongful acts, whether intentional or negligent. We have handled over a thousand cases against hundreds of large and small investment firms, including claims against both Bear Stearns and Bear Stearns Clearing Corporation.

Call us at (800) 259-9010 or contact us through our Website to arrange a free confidential consultation with an attorney to discuss your experiences with an investment advisor or financial firm which resulted in losses.

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