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Bear Stearns Reports Increased Prime Brokerage Activity; Awaits Possible Civil Action

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NEW YORK (–Increased profits were reported for the first half of the year at Bear Stearns Cos. Inc., although the specter of a Securities and Exchange Commission action from the mutual fund trading scandal remains.

Overall net income for the firm grew by 24% in the second quarter with the fixed-income revenues of US$844.4 million leading the way, thanks to a growing mortgage-related business and interest rate products.

Second quarter net revenues for the global clearing services unit were US$223.7 million, which is an increase of 19.4% from the last year. Margin debt balances were up 18.2% to total US$46.7 billion as of May 31. Bear’s prime brokerage unit reported higher margin debt, customer shorting and stock borrow balances.

Still the clearing unit will still need to deal with the cleanup following the investigation by the SEC into mutual fund trading practices. In Bear Stearn’s quarterly earnings statement, officials said they received notice that SEC staff might recommend that the commission bring a civil injunctive action and/or a cease and desist order against the clearing firm.

The Boca Raton, Fla., offices of Bear Stearns were closed earlier this month, sparking rumors that the firm was preparing to settle with the SEC. One Bear Stearns clearing client located in Boca Raton was Kaplan & Co., the company that handled mutual fund trades from Canary Capital.

Officials at Bear Stearns characterized the small office’s closure as a simple cost-cutting move resulting in the laying off of seven employees. “We continually seek to improve our operations and this action is in line with improving the efficiency of our operations,” said Bear Stearns Spokesman Russell Sherman.

According to documents released by the New York Attorney General’s office, Kaplan functioned as a go-between of Bear Stearns and Canary. Kaplan, according to a legal agreement with Canary, was the broker responsible for arranging the market-timing agreements with Bear Stearns and/or mutual fund companies.

So far Bear has terminated a number of employees following the mutual fund market timing investigation. Earlier this year Brendan Devane, Christopher Fulco and Christopher Welsh were fired. Mr. Devane was in charge of client service representatives at Bear in San Francisco, and Mr. Welsh reported to him. Mr. Fulco worked under Mr. Welsh and was likely to be the individual who set up the arrangement with Kaplan & Co. to handle trades from Canary.

According to Bear, the civil action against the company could result in monetary penalties and/or remedial sanctions. The firms said it is cooperating fully with the SEC in connection with this matter.

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