Bear Stearns to Settle SEC Fraud Probe

Bear Stearns Cos. has agreed to pay $25 million in a settlement with the Securities and Exchange Commission, which was investigating the investment firm’s relationship with a small brokerage that defrauded investors, it was disclosed in a regulatory filing Monday.

The settlement, which requires SEC approval, would head off a civil lawsuit by the SEC that was believed to be imminent. The New York-based company still faces related criminal investigations by Manhattan Dist. Atty. Robert Morgenthau and federal prosecutors, however. The SEC declined to comment. The precise nature of the SEC’s allegations has yet to be made public.

Bear Stearns said it will pay a $5-million civil fine and an additional $20 million to settle unspecified private claims, presumably those of customers who lost a total of $75 million with New York-based A.R. Baron. The investors, some of whom have sued, have maintained that Bear Stearns, which processed transactions for A.R. Baron, should have noticed signs of fraudulent activity at the smaller firm.

Bear Stearns has denied wrongdoing and said it is the responsibility of the brokerage firms themselves, not the companies that process their trades, to detect and prevent fraud.

By settling the case, the company would avoid extensive civil litigation, said Stuart J. Gordon, a former chief counsel in the SEC’s enforcement division who now is a private attorney. From the SEC’s standpoint, he said, it would have been a difficult case to prove because of the complexities of securities law concerning companies accused of helping others commit fraud.

Morgenthau won securities fraud convictions in 1997 and 1998 against several A.R. Baron executives and brokers. He has been investigating Bear Stearns’ role in the smaller firm’s failure for about a year, according to lawyers familiar with the case.