Senior Senator Questions SEC's Conduct in Bear Stearns Rescue

In a letter to SEC Chair Christopher Cox, Senator Charles Grassley said that he was deeply troubled by allegations that senior SEC enforcement officials may have inappropriately disclosed information about ongoing investigations to outside parties during the Bear Stearns rescue efforts. Specifically, the senator, who is the Ranking Member on the Finance Committee, said that he received anonymous but specific information that the SEC enforcement director gave information to the general counsel of JP Morgan Chase, himself a former SEC enforcement director, about the state of various investigations into Bear Stearns.

According to the allegations, the general counsel had called the director to get assurances and inside knowledge from the SEC to help Morgan’s negotiating position, i.e. how much to bid. The tip alleged that this inside information, gotten through a personal relationship, would be critical in helping Morgan put together a low-ball bid to Bear and the US government. Morgan could cite litigation uncertainties, while having the assurance from the SEC that the risk of litigation was not really that great. This could have materially affected the amount of guarantees that Morgan was able to negotiate from the Federal Reserve.

In view of these allegations, Senator Grassley asked the SEC to provide a detailed summary of each of the SEC investigations pending in February or March 2008 concerning Bear Stearns. The summary should include the dates on which any matter under investigation was opened and/or closed, the dates on which any formal order of investigation was considered and approved or rejected by the Commission, the dates on which any draft notice was ever prepared, regardless of whether it was finalized, and a description of the nature of the potential violations by Bear Stearns or its employees.

The SEC is also asked to provide any and all records of communications between SEC staff and representatives of J.P. Morgan Chase in February or March 2008 related to any of the cases described above. To the extent that no such records exist, the SEC should provide a detailed description of any such contacts that occurred without a record having been made and describe why no record of the communications was made.

The Ranking Member’s concern was heightened by the striking similarity of these allegations to the conduct criticized in an earlier report on the investigation of the SEC’s handling of the Pequot investigation and the termination of Gary Aguirre Such conduct, he said, would reinforce the appearance that enforcement decisions, and disclosures of information about them, are sometimes based not on the merits, but rather on access to senior officials by influential representatives of power brokers on Wall Street. In light of these allegations and the ongoing financial crisis, he emphasized, there has never been a more critical time to take swift action to restore confidence in the SEC Enforcement Division.