About criminal investigations at Bear following the closure of a couple of its fixed income hedge funds (which had drifted considerably from the strategies their prospectus and disclosures said they would follow) due to large (70-80%) losses. This headline risk is something most financial institutions discount...but one can see how quickly it can cause massive damage to a firm.
Federal Prosecutors Launch Probe of Bear Stearns Funds
By PAUL DAVIES and KATE KELLY
October 4, 2007 7:01 p.m.
Federal prosecutors have launched a criminal investigation into two
Bear Stearns Cos. mortgage-related hedge funds that collapsed during
the summer, according to people familiar with the matter.
The U.S. attorney in Brooklyn has made a request to Bear Stearns for
information related to the hedge funds, whose failure cost investors
$1.6 billion, said these people. The probe is in the early stages, the
people added, and has not generated subpoenas.
The specter of a criminal investigation is clearly bad news for the
embattled Wall Street firm, which is already under the microscope by
the U.S. Securities and Exchange Commission. Thursday, two weeks after
reporting an abysmal third quarter marred by broad declines in their
asset-management and fixed-income operations, Bear officials tried to
put a positive spin on the firm's future during an investor gathering
at its New York City headquarters.