Bear Stearns Warned of Fund-Trading Suit

Bear Stearns Cos. said Wednesday that it could face a suit from the Securities and Exchange Commission because of links to improper mutual fund trading.

Bear Stearns said the SEC told the company that the agency may pursue enforcement action. The SEC has been probing whether the New York-based company helped Canary Capital Partners and other firms make illegal trades, people familiar with the matter have said.

The warning from the SEC, called a Wells notice, signals that the agency is almost certain to either follow through with a suit or extract a settlement, said John Coffee, a corporate and securities law professor at Columbia University in New York.

“It’s very rare that a firm that receives a Wells notice persuades the SEC staff not to proceed further,” Coffee said.

The SEC and the U.S. attorney for the Southern District of New York have been investigating Bear Stearns’ clearing division, which processes securities trades, and the company’s prime brokerage unit, which provides trading, administrative and marketing services to hedge funds.

Canary Capital, a New Jersey hedge fund that cleared some of its trades through Bear Stearns, agreed to pay $40 million last year to settle civil claims of improper trading. It was the first fund targeted by New York Atty. Gen. Eliot Spitzer’s yearlong investigation of the mutual fund industry. The probe has extracted about $2.3 billion in fines and fee reductions.