Massachusetts Secretary of State William F. Galvin yesterday charged a unit of Bear Stearns Cos. with engaging in improper trading activities at two collapsed hedge funds, the first action by regulators following the funds' meltdown over the summer.
Filed on behalf of investors, the suit alleges Bear Stearns Asset Management traded complex securities from its own account with hedge funds it advised without the required notifications to the funds' independent directors.
A Bear Stearns spokesman declined to comment.
Bear Stearns also faces inquiries from the Justice Department and the Securities and Exchange Commission, said an official briefed on the matter.
But Galvin's action marks the first time formal complaints have been filed against the company. Spokesmen for both agencies said they wouldn't comment.
Both funds invested in mortgage-backed securities and collateralized debt obligations, and their bankruptcy over the summer presaged the start of wider credit concerns that have put pressure on many other financial institutions' holdings this year.
Galvin said he hopes to recover an undetermined amount of money for investors and has heard that Bear Stearns has approached some investors with hints of a possible settlement.
The bigger issue, he said, are the procedural violations "that really start to paint the picture as to how we got into the subprime mess, where the fuel for it came from."
The two funds are High Grade Structured Credit Strategies and Enhanced Leveraged.
Rules prohibit advisers such as Bear Stearns from trading with clients such as the hedge funds unless directors are notified, but Galvin's complaint charges Bear Stearns didn't properly oversee the staff who were supposed to obtain approvals from directors for the deals.
Making matters worse, Galvin said in a press release, directors of one fund based in the Cayman Islands did not answer questions or honor subpoenas, "calling into question the efficacy of their independent oversight into the trading operations of these hedge funds."
Ross Kerber can be reached at email@example.com.