In the annals of securities fraud, the defunct microcap brokerage A.R. Baron & Co. was in a class by itself. At the racketeering trial of Baron Chief Financial Officer John McAndris last year, a parade of ex-brokers gave ample support to the view of Manhattan District Attorney Robert M. Morgenthau that Baron was a racketeering enterprise that defrauded the public to the tune of $75 million. Their testimony also contained evidence that supported another troubling aspect of the Baron disaster--that Bear, Stearns & Co., which cleared trades for Baron, knew perfectly well what was going on.
Bear Stearns has long denied wrongdoing for its role at Baron. But it has been conducting protracted negotiations with the Securities & Exchange Commission that appear to be drawing to a close. In an SEC filing on June 28, the firm announced that it had reached an "agreement in principle" with the SEC staff to pay a fine of $5 million, and to pay another $20 million "to settle certain private claims."
It seems, at first blush, to be a slap in the face for Bear Stearns. The settlement's seemingly considerable size and precedent-setting nature were quickly noted in the financial press. But the stock market viewed the settlement as an assault on another part of Bear Stearns' anatomy--its wrist. Bear's share price rose swiftly after the news came out at midday. True, good news on interest rates boosted all financial firms, but clearly the settlement was viewed as a win for Bear Stearns.
NOT EVEN A DENT. And no wonder. For one thing, $25 million is chump change for Bear Stearns, whose aftertax profits topped $660 million last year--a good chunk of which comes from its clearance activities for smaller firms. The deal has several other positive elements from Bear's perspective. Word of the settlement may put a damper on a criminal investigation of Bear's role at Baron being conducted by Morgenthau's office. Bear's role as clearing agent for yet another defunct brokerage, Sterling Foster & Co., is being probed by the U.S. Attorney in Manhattan. At Baron and Sterling alike, the issue is the same: Did Bear abet investor ripoffs?
The looming criminal probes may well explain why the settlement was announced. Bear Stearns could have kept mum about it. John C. Coffee, a professor at the Columbia University School of Law, says that "it's kind of noteworthy that Bear Stearns was rushing to get this information out." He says the settlement was far too small to require an SEC filing by a company of Bear Stearns' size.
Coffee believes word of the tentative settlement was rushed out to head off any possible criminal proceedings by Morgenthau's office. "That's a way of trying to convince the prosecutors that there's enough blood being paid pursuant to the settlement that they don't have to threaten the criminal sanction," says Coffee. Bear Stearns declined to comment on either the settlement or Coffee's theory regarding why it was announced.
UNANSWERED QUESTIONS. To be sure, a number of variables remain undetermined--such as the scope of the settlement, or any further steps Bear may be required to take as part of its deal with the SEC. Also undetermined is the fate of Bear Stearns' chief of clearing, Richard Harriton. Morgenthau's office and the SEC are investigating Harriton's relationship with Baron Chief Executive Andrew Bressman, who pleaded guilty to illegal activities at Baron. Harriton's lawyer, Howard Wilson, declined comment on the criminal probes and said his talks with the SEC were continuing.
True, the final settlement may contain various requirements to ensure that Bear could never again turn a blind eye to small investors being ripped off. But 30 cents on the dollar for Baron customers? It might be adequate if Bear Stearns did not actively help Baron fleece investors. But what if its role was more extensive? If indeed the evidence points to Bear Stearns' actively helping A.R. Baron, the SEC should reject the settlement worked out by its staff--and hold Bear accountable for every penny that was lost by A.R. Baron's customers.