Risk & Compliance

SEC Probes Bear Stearns’s Last Gasps

The regulator is looking into the firm's activities before the JP Morgan Chase buyout.
Sarah JohnsonMarch 19, 2008

A week after Bear Stearns’s sudden meltdown, the Securities and Exchange Commission revealed that the staff has been scrutinizing the firm’s actions made before it was acquired.

The speedy acquisition of the firm by JP Morgan Chase & Co. on Sunday — with the help of the Federal Reserve — just now has news about the behind-the-scenes actions trickling out. For one, the SEC shared some information about its recent communications with Bear Stearns in an unusual document couched as a way to answer investors’ questions. In addition, Bear Stearns revealed that it changed its bylaws on Sunday in anticipation of lawsuits.

The firm’s former employees may need to retain counsel if the SEC’s Division of Enforcement alleges improprieties occurred before Sunday’s deal went through. The new bylaw says expenses, including attorneys’ fees, will be paid or reimbursed by the company upon request by an employee.

The SEC sent a letter to JP Morgan Chase regarding the “conduct and statements by Bear Stearns before the public announcement of the transaction,” the commission said. The letter cautions that “reaching conclusions about those inquiries would be premature.” During its investigation, the SEC will look for signs of insider trading or market manipulation stemming for misleading statements made by company employees in the 60 days leading up to Sunday.

If enforcement action is warranted against JP Morgan Chase, the regulator will “favorably take into account the circumstances” of the acquisition.

They were certainly unusual circumstances. Just four days after Bear Stearns CEO Alan Schwartz said his firm had strong liquidity, JP Morgan Chase agreed to buy Bear Stearns for about $2 per share, and the Federal Reserve said it would fund up to $30 billion of Bear Stearns’ less liquid assets.