Bear Stearns Cos. plans to turn over documents to securities regulators showing that several financial giants, including Goldman Sachs Group Inc., Citadel Investment Group and Paulson & Co., slashed their exposure to the securities firm in the weeks before its collapse.
The Securities and Exchange Commission, as part of an ongoing inquiry into the events surrounding Bear Stearns’s implosion in March, has sought and will examine these trading records, people familiar with the matter say. The SEC is expected to use the data to determine whether any trading activity was improperly coordinated in any way, constituted manipulation or otherwise contributed to Bear Stearns’s collapse.
The trading records, which were reviewed by The Wall Street Journal, open a window into the frenzied selling that came amid a bank run on Bear Stearns in early to mid-March. In the three weeks preceding Bear Stearns’s collapse, Goldman, Citadel and Paulson exited about 400 trades where Bear Stearns was the trading partner, more than any other firms did, the data show. The SEC has asked Bear Stearns to highlight any unusual activity in the trading documents, which Bear Stearns is expected to do soon, according to people familiar with the matter.
The documents don’t suggest any improper activity. There could be many reasons why hedge funds and others wanted to limit their exposure to Bear Stearns. And some financial players, including Goldman, simultaneously increased trading exposure to Bear Stearns on some deals even as they cut their risk on others.
Any SEC case alleging manipulation wouldn’t be easy to prove because of the complexity of the trades and because there were widespread concerns about Bear Stearns’s health in the market. Representatives of the SEC, Bear Stearns, Goldman, Citadel and Paulson declined to comment.
The SEC already has sent broad document and data requests to a number of hedge funds as part of its informal inquiry into whether there was insider trading or market manipulation of Bear Stearns, people familiar with the matter say. They say the requests were broad and sought trading data, including short positions — bets on a decline in a security — and options and other derivatives, which are financial contracts whose value shifts with the movement in an underlying security. The SEC has delved more deeply into the ties among hedge funds, their clients and their prime brokers with a particular focus on flows of information and potential insider trading.
The SEC is interested in who was exiting contracts in which Bear Stearns was the counterparty during the first two weeks of March, people familiar with the matter say. Bear Stearns effectively ran out of cash on the afternoon of March 13, and it was considering a bankruptcy-court filing before J.P. Morgan Chase & Co. and the Federal Reserve agreed to a bailout on the morning of March 14.