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More Trouble for Bear Stearns, As FTC Probes Mortgage Unit

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The Federal Trade Commission (FTC) is looking into the possibility that Bear Stearns Cos’ EMC Mortgage Corp unit may have violated laws regarding its servicing activities. According to the SEC filing, FTC staff believes EMC and Bear Stearns violated a number of federal consumer protection statutes. The FTC delivered a draft complaint and draft consent order asking for changes in business practices and unspecified monetary payments, according to the filing. EMC expects to engage in settlement talks before a formal complaint is filed, the filing shows.

Last week, the SEC indicated it was considering the its own investigation of the Bear Stearns collapse. Bear Stearns, once the fifth-largest U.S. investment bank, faced a run on the bank in March and was forced to sell itself to JPMorgan Chase & Despite the company’s assurances that it had plenty of cash on hand to continue operations, it collapsed last month. The buyout of Bear Stearns by JPMorgan Chase – termed a “shotgun marriage” by some – was consummated after the Federal Reserve agreed to provide up to $30 billion in non-recourse financing to JPMorgan, with Bear Stearns’ illiquid mortgage and other securities as collateral.

In the days leading up to the Bear Stearns failure, several of the investment bank’s executives made reassuring statements about its prospects. On the Monday before the buyout, when rumors started to circulate that Bear Stearns might not have enough cash to do business, the firm’s executives sent out a press release to calm fears. It said Bear Stearns’ “balance sheet, liquidity and capital remain strong. … There is absolutely no truth to the rumors of liquidity problems that circulated today in the market.” That Wednesday, Bear Stearns CEO Alan Schwartz appeared on CNBC to reassure investors that the firm had ample liquidity and said he was “comfortable” that it would turn a profit in its fiscal first quarter.

But by that Thursday, Bear Stearns’ solvency was being called into question and by Friday it told regulators it was ready to file for bankruptcy. The SEC enforcement division has written a letter to JPMorgan that discussed “investigations and potential future inquiries into conduct and statements by Bear Stearns” before the announcement of the takeover, the agency said.

Bear Stearns shareholders have also been exploring their legal options. Shareholders might sue Bear and its executives and officers for securities fraud, contending they failed to disclose the company’s true financial health, lawyers say. Separate suits may be brought by Bear Stearns employees who hold company shares that are now virtually worthless

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