Commentary: Now We'll Never Get The Truth About Bear Stearns

When the Securities & Exchange Commission settled securities-fraud charges against Richard Harriton, former chairman of the clearing subsidiary of Bear, Stearns & Co., there were smiles all around. The SEC was happy. Harriton was happy. Bear Stearns was happy. "We wish him well," said a statement from the firm, which had backed him through thick and thin.

What warranted all this good cheer was a settlement, announced on Apr. 20, under which a $1 million fine was imposed on Harriton, accused of aiding the A.R. Baron & Co. microcap house in its $75 million securities-fraud scheme. The SEC professed satisfaction with the settlement. Harriton was happy because the SEC dropped its most serious charge, that he was a direct participant in the fraud scheme at Baron. His lawyer, Howard Wilson, notes that the settled charges involved mere "negligence"--and points out that Harriton was neither admitting nor denying even those allegations.

"DODGED BULLET." Bear Stearns has every reason to be happiest of all--and for the same reason that the public has every reason to be dissatisfied with the settlement. Harriton and Bear both faced a public exhibition of what might have been some very dirty laundry--a trial before an SEC administrative law judge that had been scheduled to begin on May 1. Bear Stearns had already escaped a trial on its role at Baron by paying $38.5 million in penalties and restitution to settle similar SEC charges--also neither admitted nor denied. In its pacts with Bear and Harriton, the SEC found that the exec and the firm--which cleared and executed trades for Baron--were each "a cause" of the fraud committed by A.R. Baron.

But what was the extent of any wrongdoing? And if there was misconduct at Bear Stearns, how high up the chain of command did the responsibility lie? Those and other serious questions remain unanswered--and will probably never be answered. One lawyer, who is familiar with Bear Stearns and was involved in the criminal case against A.R. Baron officials, says: "Bear dodged a bullet."

Sure, the settlement does appear tough, compared with previous SEC settlements with the officials of major brokerages. And securities lawyers note that the SEC was dealing with novel legal issues involving the liability of clearing firms with crooked clients. William R. Baker III, the SEC's associate director of enforcement, correctly notes that Harriton's $1 million fine and lifetime ban from the securities industry are more severe than past settlements.

But the earlier settlements had the same glaring weaknesses that are evident in the settlement with Harriton. Take, for example, one SEC settlement cited by Baker, involving former Salomon Brothers Chief Executive John H. Gutfreund and stemming from the 1991 Salomon bond-trading scandal. Gutfreund agreed to a $100,000 fine and a lifetime ban on serving as a brokerage chairman or CEO. Since then, he has vigorously denied wrongdoing.

Yes, the fine against Harriton is 10 times that amount. Big deal. While Bear and his lawyer decline comment on the subject, other lawyers say it's common practice for such fines to be paid by one's former employers. Likewise, the tab for his lawyers, which probably ran into seven figures, was also probably paid by his deep-pocketed employers. Also, Harriton can apply after two years to get the ban lifted--and he has an excellent chance of succeeding.

Whatever happens, Harriton will have every right to protest his innocence, as Gutfreund has done, or to claim that he was merely "negligent." True, there have been criminal probes into Harriton's role at both Baron and another defunct firm--Sterling Foster. If those go forward, they may clear up the links between Harriton, Bear Stearns, and the netherworld of Wall Street. But securities lawyers say the SEC pact with Harriton signals an end to the investigations. Wilson knows of no active criminal probe of his client.

So in all likelihood there will never be answers to all the thorny questions raised by this massive investor ripoff. Indeed, the settlement raises a troubling question of its own: Is the SEC too lax, too prone to impose meaningless fines, too prone to agree to lame "consent decrees," when it comes to allegations of serious wrongdoing by the largest and most powerful Wall Street firms?

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