Articles Posted in Bear Stearns

A district court has granted in part the motion for class certification in the securities fraud lawsuit against J.P. Morgan Clearing Corp. and J.P. Morgan Securities Inc. involving an alleged investment scam with Sterling Foster & Co. The alleged scheme involves the manipulation of the the market for ML Direct Inc. securities during and after an IPO. The JPM entities are named in their capacity as Bear Stearns & Co. Inc. and Bear Stearns Securities Corp. successors.

The court says that one day after the IPO’s start, ML Direct stock’s price more than doubled because Sterling Foster had bought most of it. The firm then sold over 3.375 million ML Direct at about $14 to $15 a share. Because only 1.1 million shares in the IPO were for sale, the court says that Sterling Foster sold 2.3 million more shares than it owned. The other available ML Direct shares were held by insiders, who had a lock-up agreement barring them from selling their shares within the first year of the IPO unless they obtained underwriter Patterson Travis Inc.’s consent.

Sterling Foster and the insiders allegedly became involved in an undisclosed agreement that allowed the brokerage firm to buy the insiders’ stock at the $3.25/share offering. Sterling Foster then bought their securities, which were delivered to Bear Stearns. The court says that as a result, the brokerage firm made a $24 million profit.

The plaintiffs are saying that the offering documents misled the investing public into thinking that significantly less ML Direct shares were being offered and that the market had set the $13 to $15/share price when Sterling Foster had artificially created it and then bought shares from insiders at the lower share price. The plaintiffs claim that Bear Stearns, as Sterling Foster’s clearing house, knowingly took part in the investment scam.

The plaintiffs moved to certify a class so they could pursue their Section 10(b) and Section 20(a) claims. The court granted the motion as to the Section 10(b) antifraud claims but denied the latter, which involves claims for control person liability.

Related Web Resource:
Levitt v. JP Morgan Securities Inc, Continue Reading ›

Over two dozen bankers at Wall Street investment firms have been listed as co-conspirators in a bid-rigging scheme to pay lower than market interest rates to the federal and state governments over guaranteed investment contracts. The banks named as co-conspirators include JP Morgan Chase & Co, UBS AG, Lehman Brothers Holdings Inc., Bear Stearns Cos., Bank of America Corp, Societe General, Wachovia Corp (bought by Wells Fargo), former Citigroup Inc. unit Salomon Smith Barney, and two General Electric financial businesses.

The investment banks were named in papers filed by the lawyers of a former CDR Financial Products Inc. employee. The attorneys for the advisory firm say that they “inadvertedly” included the list of bankers and individuals and asked the court to strike the exhibit that contains the list. The firms and individuals on the co-conspirators list are not charged with any wrongdoing. However, over a dozen financial firms are contending with securities fraud complaints filed by municipalities claiming conspiracy was involved.

The government says that CDR, a local-government adviser, ran auctions that were scams. This let banks pay lower interests to the local governments. In October, CDR, and executives David Rubin, Evan Zarefsky, and Zevi Wolmark were indicted. They denied any wrongdoing. This year, three other former DCR employees pleaded guilty.

While the original indictments didn’t identify any investment contract sellers that took part in the alleged conspiracy, Providers A and B were accused of paying kickbacks to CDR after winning investment deals that the firm had brokered. The firms were able to do this by allegedly paying sham fees connected to financial transactions involving other companies.

Per the court documents filed in March, the kickbacks were paid out of fees that came out of transactions entered into with Royal Bank of Canada and UBS. The US Justice Department says the kickbacks ranged from $4,500 to $475,000. Financial Security Assurance Holdings Ltd divisions and GE units created the investment contracts that were involved.

Approximately $400 billion in municipal bonds are issued annually. Schools, cities, and states use money they get from the sale of these bonds to buy guaranteed investment contracts. Localities use the contracts to earn a return on some of the funds until they are needed for certain projects. The IRS, which sometimes makes money on the investments, requires that they are awarded on the basis of competitive bidding to make sure that the government gets a fair return.

Related Web Resources:
JPMorgan, Lehman, UBS Named in Bid-Rigging Conspiracy, Business Week, March 26, 2010
U.S. Probe Lays Out Bid Fixing, Bond Buyer, March 29, 2010
Read the letter to District Judge Marrero (PDF)
Continue Reading ›

The Securities and Exchange Commission’s Office of the Inspector General says the agency failed to fulfill its mission in the oversight of Bear Stearns. Inspector General David Kotz says not only did the SEC neglect to order the company to cut back on risk taking, but it missed possible “red flags” leading up to JP Moran Chase & Co.’s purchase of the faltering investment bank.

Kotz’s report says that despite identifying the risks that would lead to the sub-prime mortgage crisis, the SEC staff did not exert its influence to mandate that Bear Stearns add a potential market collapse scenario to its list of possible risks.

Kotz is accusing the SEC of not making any efforts to make Bear Stearns raise money or lower its debt. He is also criticizing the agency for allowing internal audits, rather than external audits, at Bear Stearns.

Also in his report, Inspector General Cox accuses the agency of not doing anything to find the shortcomings in Bear Stearn’s risk management of mortgages and failing to avail of opportunities to prod management at Bear Stearns to deal with problems. He says the SEC should have taken more time to evaluate Bear Stearn’s 2006 annual report and get additional information from the investment firm, which would have required the company to reveal more information about its mortgage portfolio to investors.

The SEC’s division of trading and markets disagrees with Kotz’s findings and claims that that the report began with incorrect assumptions and arrived at unrealistic and inaccurate conclusions that were not practical. SEC Chairman Christopher Cox says that, if anything, the SEC’s failures occurred because the agency had not been given enough authority to oversee the investment banks and that Kotz’s report affirms this.

The sale of Bear Stearns and Merrill Lynch & Co, Lehman Brothers Holding Company’s bankruptcy, and the filings by Goldman Sachs Group Inc. and Morgan Stanley to become bank holding companies means that the SEC is no longer overseeing any large investment firms. While the agency will continue reviewing broker-dealer businesses, it is terminating its oversight program of independent investment banks’ parent companies.

Related Web Resources:

SEC Watchdog Faults Agency in a Bear Case, Wall Street Journal, October 11, 2008
SEC Office of Inspector General

Bear Stearns, A Division of JP Morgan Continue Reading ›

The Securities and Exchange Commission has subpoenaed over 50 hedge fund advisors, including SAC Capital Advisors, Goldman Sachs Group Inc., and Citadel Investment Group, as part of its probe into whether rumors affected the shares of Bear Stearns and Lehman Brothers.

The SEC is looking for information related to options trading and short-selling involving the two investment firms. The subpoenas are part of a wider investigation about trades in bank securities and the communications between the hedge funds and others. The SEC has reassured the parties being subpoenaed that they are not necessarily direct targets of the probe.

Last week, regulators announced that they are investigating whether certain managers had spread rumors to cause share prices to drop. Investigators are also trying to figure out whether correct policies and training procedures had been put in place to detect market manipulation.

U.S. Representative Barney Frank, the chairman of the House Financial Services Committee, is calling on the Securities and Exchange Commission to expand its probe into whether any improper trading in investment banks’ shares has recently taken place. He wants the SEC to determine whether the rumors of misconduct are being circulated to drive certain investment banks, such as Bear Stearns, out of business.

In a letter addressed to SEC Chairman Christopher Cox, Frank noted that there had been an “unusually high level of short-selling activity” in Bear Stearns stock right before the company fell apart. He also noted that similar trading in the stocks of other large investment banks has occurred.

Frank cited concerns that some of this trading may be orchestrated by market participants that are trying to bring the share prices down. Frank is calling on the SEC to investigate trading activity of stocks in all the big investment banks.

Following JP Morgan Chase & Co’s acquisition of Bear Stearns Companies Inc., JP Morgan Chase Chief Financial Officer Michael Cavanagh says the firm is reserving as much as $6 billion for “transaction-related costs,” including possible litigation.

Class action lawsuits could come from investors regarding corporate disclosure, as well as from employees over pension plans. Any securities lawsuits targeting Bear Stearns as the plaintiff will also go to JP Morgan Chase.

Lawsuits expected may include those related to the 1934 Securities Exchange Act Section 10(b) (a general antifraud provision) by investors that may feel that Bear Stearns did not disclose accurate information about the company’s health. Employees may sue if they believe that the Employee Retirement Income Security Act (ERISA) had been violated.

In a note to investors, Wachovia Securities Analyst Doug Sipkin commented on the state of the leading Wall Street securities firms in light of the worsening global credit crisis.

Sipkin blamed the “The failure of Bear Stearns” on a “management issue” rather than a “market issue.” JP Morgan Chase & Co. recently purchased Bear Stearns, the fifth largest securities company, for $236 million-that’s $2/share-a 90% market drop in just two days. The securities firm ran out of money after clients took away funds.

Sipkin, however, reassured investors that the action taken by the Federal Reserve to reduce emergency lending rates will keep the other four big securities firms in business.

Yesterday – Sunday – it was reported that JP Morgan bailed-out Bear Stearns by paying its shareholders a measly quarter of a billion dollars. One question plaguing Wall Street is how many other victims of sub-prime mortgages will emerge? Below we assess the winners and losers of this deal and also report some good news: Claims by investors who had accounts at Bear Stearns are not dead!

Winners and Losers?

A year ago, BSC’s stock sold for $150 per share. Last Friday BSC’s shares fell from 57 to 30. Reportedly, as government big-wigs and financial moguls met on Saturday to attempt to salvage BSC, there were discussions with several firms to pay around $15 per share but on Sunday only JP Morgan was left – offering $2 per share. Although BSC faced certain bankruptcy if nothing were done, Bear Stearns shareholders say they are the big losers.

What was the role of the Securities and Exchange Commission in the collapse of the subprime mortgage bubble? Although mortgage brokers, investment banks, and ratings agencies are frequently held responsible for the demise, little is said about the roles of the Financial Industry Regulatory Industry (FINRA) and the SEC-both watchdog agencies that are responsible for monitoring complex credit derivatives and their suitability requirements for investors.

Yet where was the SEC when it was time to oversee investment banks and determine whether they had sufficient capital for their balance sheets, trading positions, and the appropriate risk management systems so that major losses could be avoided?

One notable problem is that there is not enough clear data available about the credit derivatives market. Structured finance products, including collateralized debt obligations (CDOs) are traded over-the-counter in the United States. This means that price information for these products is not easily accessible.

On Christmas Eve a Bear Stearns client received a present – a check for $1,000 – less some fees. While a check for $1,000 at Christmas time can come in handy, it was no gift since this was to close out an investment by the client in 2001 of almost $120,000!

Accoording to the paperwork provided to the investor, management chose to terminate early the Bear Stearns Multi-Stragegy Warants expiring March 31, 2009. The warrants, stated in the notice provided, were “linked to the performance of the Bear Stearns Multi-Strategy Fund, L.P.” the value of the warrants at maturity was to be based upon the average of the six month-end “net asset value” of the fund. That maturity never occured because the warrants were ended abruptly more than a year early.

According to the notice “the underlying constituents of the Fund were: New Castle Millennium II, L.P., New Castle Market Neutral, L.P. and Bear Stearns Emerging Markets Macro Fund, L.P., Bear Stearns Institutional Leveraged Loan Fund, L.P. Bear Stearns ABS Partners, L.P. and Bear Stearns High-Grade Structured Credit Strageties Enhanced Leverage Fund, L.P., with approximatelly equal wieghting.”

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