Tester requests Justice Department investigation into Bear Stearns trading
Senator wants to know if illegal trading led to bank's downfall
(WASHINGTON, D.C.) – Senator Jon Tester today asked the Justice Department to investigate whether illegal insider trading led to last month's downfall of troubled investment bank Bear Stearns.
Tester today sent letters to U.S. Attorney General Michael Mukasey and Christopher Cox, the Chairman of the Securities and Exchange Commission (SEC), asking them to "immediately and thoroughly investigate" the situation.
"I hope they tell me that it was fear and nothing but market dynamics and not illegal trading," Tester said during a speech on the Senate floor this morning. "But if there was insider trading and market manipulation, the proper law enforcement authorities of the United States government must respond with appropriate action and prosecute any wrongdoing to the fullest extent of the law."
Bear Stearns nearly collapsed last month, but the Federal Reserve Board and the U.S. Treasury agreed to risk nearly $30 billion in taxpayer money to facilitate the bank’s sale to rival JP Morgan Chase.
Tester noted that the volume of trading in Bear Stearns shares jumped dramatically before the sale, leading to concerns that illegal trading may have played a role. Last year, the record high for Bear Stearns shares traded in one day was 28 million. But on March 14 — just days before the sale — shares of Bear Stearns were traded nearly 187 million times.
The call for an investigation stems from a Senate Banking Committee hearing last week. Tester asked Chairman Cox if there is any evidence suggesting that speculators bet heavily that Bear Stearns' share price would fall, known on Wall Street as "short selling."
"We must be certain that investors did not violate laws barring speculators from engaging in market manipulation or insider trading," Tester said today. "We must be certain that the taxpayers did not post a preemptive bailout to cover massive short selling for those to make money in the markets."
Tester also said that many Montanans are troubled by the decision to spend nearly $30 billion to bail out a Wall Street bank.
"These families cannot be asked to cover what some are calling a government bailout when they are having hard time filling their truck with diesel and to save for their kid's college fund," Tester said on the Senate floor today.
In his letter, Tester asked for a report to the Banking Committee "as early as possible" on any findings by the Justice Department and the SEC.
Tester's letter to Mukasey and Cox appears below.
April 10, 2008
Dear Attorney General Mukasey:
Dear Chairman Cox:
I write to ask that the Securities and Exchange Commission (SEC) and Department of Justice immediately and thoroughly investigate the role that short selling played in the events surrounding Bear Stearns leading up to and during March 13-17, 2008. The investigation should specifically addressing illicit insider trading that may violate the Insider Trading Sanctions Act of 1984, the Insider Trading and Securities Fraud Enforcement Act of 1988 or any other applicable statute. With potentially $29 billion dollars of taxpayer money on the line, we must determine whether any wrongdoing occurred.
On Thursday, April 3, 2008 during a hearing in Senate Committee on Banking, Housing and Urban Affairs regarding the "Turmoil in U.S. Credit Markets: Examining the Recent Actions of Federal Financial Regulators" I asked Chairman Cox to respond to rumors on the role investor speculation played in the rapid demise of Bear Stearns's capital and liquidity positions. Specifically, I inquired if there is any evidence suggesting that speculators had bet heavily that Bear Stearns’ share price would fall, known on Wall Street as "short selling."
Chairman Cox responded, "I'm a little bit constrained because the SEC is in the law enforcement business." He continued that SEC pursues insider trading aggressively and said his agency was mulling "several law enforcement matters" that had not been filed in any U.S. court.
I certainly understand that the capital markets operate at a rapid pace with investors taking positions on a security based on the value of the underlying asset, but market manipulation is illegal and needs to be prosecuted to the fullest extent. Under normal circumstances these acts are unlawful. However, the corresponding acts that occurred with Bear Stearns rapid dissent and the federal government's unprecedented role in the company's acquisition by JP Morgan Chase have graduated from a possible criminal act to one of unconscionable proportions.
The American taxpayers are now saddled with a risky $29 billion position as part of the Bear Stearns-JP Morgan Chase merger, thousands of workers will soon be facing unemployment and the Federal Reserve took a nearly unprecedented position entering itself into the private marketplace by financially backing the purchase of an investment bank. These are not normal times and require the investigative arm of the United States government to respond with appropriate action.
I ask that you respond to the Senate Banking Committee with a report on your findings as early as possible.
While I recognize that you can not comment on a possible ongoing criminal investigation, you must recognize the seriousness of possible wrongdoings in this situation.
I look forward to your prompt response.