Now that you’ve seen what ACA Insight has to offer, don’t be without it. Subscribe now!

The weekly news source for investment management legal and compliance professionals

Current subscribers - please log in to the website in the upper right-hand corner

News June 21, 2004 Issue

Bear Stearns Allegedly Tipped SEC on Beacon Hill’s Pricing Problem

That’s just one of the tidbits dropped in the SEC’s amended complaint against Beacon Hill Asset Management. The complaint, which is worth a read by anyone involved in bond pricing issues, now additionally charges the four principals of BHAM with various fraud counts.

Taking a page from Eliot Spitzer’s playbook, the SEC sprinkled the complaint with excerpts from what appear to be e-mails. For example, one of the BHAM principals allegedly wrote another: “I just wanted to let you know [one of the BHAM traders] thinks he’s up $2 million this month.” In a response, the other principal replied back: “that’s good, now it means [we’re] only down [$]18 [million] on the month.”

The SEC alleged that BHAM and its principals made fraudulent misrepresentations to investors by announcing that their fund had declined only 25 percent, when allegedly the drop was closer to 50 percent. Three days after that announcement, the SEC said that Bear notified them that BHAM had valued its fund “far in excess of Bear Stearns' valuation.”

The SEC also claimed BHAM didn’t follow its own pricing procedures and falsely stated on RFPs that it obtained quotes from “three brokers” or from the repo market. The SEC claimed that as their alleged pricing problems began to surface, three of the four principals sold off some bonds in their personal holdings at favorable prices. Interestingly, the complaint includes an Advisers Act Section 206(3) count related to those principal trades. The SEC alleged that in an effort to prop up the performance of two managed accounts, BHAM caused its master fund to purchase a number of bonds from the accounts at inflated prices. The SEC claimed that BHAM engaged in interest rate speculation, contrary to its stated market neutral investment strategy. The SEC characterized a claw-back arrangement between BHAM and its 50 percent corporate owner as a “financial incentive to commit fraud,” because the principals stood to earn $26 million if BHAM met certain performance and AUM targets.

Of course, that’s just one side of the story.

“Beacon Hill and its principals intend to vigorously contest these baseless allegations,” BHAM outside counsel Kevin Marino told IM Insight. “We are confident that at the end of the day we will be exonerated.”