The U.S. Securities and Exchange Commission and the New York Stock Exchange today announced a US$250 million enforcement settlement with brokerage firm Bear, Stearns for late trading and market timing violations.

The SEC settled with Bear, Stearns & Co. Inc. and Bear, Stearns Securities Corp. over allegations of securities fraud for facilitating unlawful late trading and deceptive market timing of mutual funds by its customers and customers of its introducing brokers. The commission issued an order finding that from 1999 through September 2003, Bear Stearns provided technology, advice and deceptive devices that enabled its market timing customers and introducing brokers to late trade and to evade detection by mutual funds.

Under the terms of the order, Bear Stearns will pay US$250 million, consisting of US$160 million in disgorgement and a US$90 million penalty. The money will be paid into a Fair Fund to be distributed to the harmed mutual funds and mutual fund shareholders. Bear Stearns will also undertake significant reforms to improve its compliance structure. The firm agreed to the penalty without admitting or denying the commission’s findings.

Simultaneously, NYSE Regulation, Inc. censured and fined Bear Stearns, and imposed compliance with these undertakings. The fine imposed by the NYSE will be deemed satisfied by the payment of the US$250 million pursuant to the commission’s order.

The SEC reports that in 1999, the firm established a “timing desk” to manage the increasing flow of market timing trades through BSSC. The timing desk assisted customers to enter late trades and even to cancel unprofitable trades the following day. The timing desk also advised customers and brokers on how to evade the blocks and restrictions imposed by the mutual funds and how to negotiate BSSC’s own blocking system. Some market timers expressed their appreciation for this assistance by giving timing desk employees gifts such as spa gift certificates, event tickets and meals.

It notes that Bear Stearns also facilitated late trading by knowingly processing a large number of late trades for certain of their market timing customers. In some cases, brokers falsified order tickets. On the clearing side, BSSC gave introducing brokers and prime brokerage customers with mutual fund trading business direct access to its mutual fund order entry system, which permitted users to enter orders until 5:45 p.m. and processed all trades, regardless of when they were actually received, as if they had been received before 4:00 p.m.

The SEC adds that Bear Stearns also helped its market timing customers evade detection by mutual funds that did not want market timing business. It says that between 1999 and 2003, BSSC received thousands of letters or emails from mutual funds complaining about abusive trading or requesting that timing be stopped.

Linda Chatman Thomsen, SEC Enforcement Division Director, said, “For years, Bear Stearns helped favored hedge fund customers evade the systems and rules designed to protect long-term mutual fund investors from the harm of market timing and late trading. 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.”

“It is disturbing how so many people in so many different units worked together to circumvent the blocks and restrictions set up by the mutual funds,” said Richard Ketchum, chief executive officer, NYSE Regulation, Inc. “By using deceptive practices, Bear Stearns enabled their clients to generate hundreds of millions of dollars in profits at the expense of mutual fund shareholders. This type of behavior is completely outrageous and unacceptable.”