SEC Investigates Bear Fund

From Business Week

Bear Stearns (BSC) may have a lot of explaining to do about a big restatement of losses at one of its troubled hedge funds—and not just to its investors. BusinessWeek has learned that the Securities & Exchange Commission recently opened a preliminary inquiry into the near-collapse of Bear Stearns' High-Grade Structured Credit Strategies Enhanced Leveraged Fund. People familiar with the inquiry say regulators are interested in learning how the Wall Street investment firm came to dramatically restate the April losses for the 10-month-old fund, which invested heavily in securities backed by subprime mortgages, or home loans to consumers with shaky credit histories.

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A spokesman for the SEC declined to comment, as did a Bear Stearns spokesman. But people familiar with the inquiry say lawyers from the SEC's main office in Washington are beginning to gather information about the troubling series of events at the hedge fund.

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But the magnitude of the April restatement is raising eyebrows on Wall Street. Mortgage and bond traders say that while the banks may have contributed to some of Bear Stearns' higher losses, it's unlikely they were the complete cause of the restatement. Some have speculated that Bear Stearns may have had to recalculate the price of its subprime-backed bonds after liquidating some assets to honor earlier investor redemptions. Others says Bear Stearns' system for modeling the value of its subprime securities may have been too optimistic, prompting the hedge funds' auditors to raise questions about the methodology and forcing recalculations.

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To be sure, it's worth noting that the SEC inquiry is so preliminary that regulators have not issued any subpoenas. It's not uncommon for the SEC to open investigations after hedge-fund blowups. Last fall, the SEC's Boston office began examining the collapse of Amaranth Advisors , a hedge fund that lost nearly $6 billion from a series of wrong-way bets on the natural gas market. To date, nothing has come of that inquiry. The fund shut down in 2006.