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Wall Street Journal, April 15, 2008 article


The Wall Street Journal

April 15, 2008


Bear Receives
SEC Notice;
Net Falls 79%

April 15, 2008; Page C2

Reflecting the stunning speed with which a funding crisis engulfed Bear Stearns Cos., the Wall Street firm reported a profit of 86 cents a share for its fiscal first quarter, which ended just weeks before it agreed to be sold to J.P. Morgan Chase & Co. for $10 a share.

In a securities filing Monday, Bear also disclosed that it received a notice from the Securities and Exchange Commission that civil charges could be in the offing for anticompetitive practices in its bidding for municipal securities. (Read the filing1.)

Consumer-Protection Issue

In addition, the Federal Trade Commission has said it believes Bear and its EMC Mortgage Corp. mortgage-servicing unit have violated federal consumer-protection statutes, according to the filing.

Bear said it is cooperating with both agencies.

Bear's earnings and other disclosures shed additional light on its business during the quarter that ended Feb. 29, when turbulence in the credit markets squeezed its bond sales and trading businesses, among others.

Much of the information may be largely irrelevant to the firm's investors, however. Bear's sale to J.P. Morgan is pending approval by shareholders and is expected to close no later than June 30, according to filings from both companies.

Bear's revenue during the first quarter was $3.4 billion, compared with $4.8 billion under far more favorable market conditions in the same period in 2007. Bear's net income fell 79% to $115 million, from $554 million, or $3.82 a share, a year earlier.

According to Monday's filing, the FTC believes EMC and Bear Stearns have violated federal consumer-protection statutes "in connection with EMC's servicing activities." The FTC staff wants to resolve the matter through "consent negotiations" before it seeks approval from agency officials to file a formal complaint.

Municipal Probe

Bear said that in February it received a Wells Notice, or a warning from the SEC that civil charges might be coming, "in connection with the bidding for various financial instruments associated with municipal securities." That notice comes in connection with a probe the SEC and the Justice Department are conducting on the conduct of Wall Street firms that packaged and sold municipal derivatives (securities based on underlying assets such as city bonds) beginning in 1990.

According to the filing, Bear Stearns expects an opportunity to respond to the charges before the SEC staff makes a formal recommendation to the commission.

Employees Under Duress

In an unusual admission, Bear noted in the filing that in the weeks since the first quarter ended and the J.P. Morgan deal came together, some employees had been having difficulty performing their jobs.

"Human error in times of extreme difficulty and turmoil, such as the company...continues to experience, can occur," the Bear Stearns filing states. "Control and process breakdowns may be more frequent when a company is operating under duress and its employees become distracted by crisis management."

Write to Tony Cooke at tony.cooke@dowjones.com2 and Kate Kelly at kate.kelly@wsj.com3

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