Manhattan DA Investigates Bear Stearns Mortgage Traders

Could some Wall Street bankers finally end up behind bars for fraud in connection with the financial crisis? Up to now, we haven't seen any high profile criminal prosecutions of bank execs, but that may soon change. The Manhattan District Attorney is going after several key former Bear Stearns mortgage bond traders for allegedly misrepresenting securities and for an alleged double-dipping scheme, reported here in January by Teri Buhl. She writes a follow-up today breaking this news in the Distressed Debt Report. How hard will it be to throw these former Bear execs -- all of whom now hold prominent positions at other financial firms -- in jail?

Tragically, Buhl's article is behind a pay wall. But it reports that the Manhattan DA hasn't determined if they will ultimately charge the former Bear traders with a misdemeanor or a felony -- it depends on whether they can prove intent to defraud.

The article further says that New York State Assemblyman Joseph Morelle, who also serves as the chairman of the Assembly Insurance Committee, is leading a campaign to look into possible charges of insurance fraud as well. Those charges depend on if the former Bear execs "knowingly made materially false representations that insurers had justifiably relied on, and that caused damage to the insurers." Morelle has also been working to persuade the New York Attorney General to investigate, according to Buhl. She details some of these allegations in a blog entry today, which thankfully you can read for free.

As I stated before, these fraud allegations should actually be fairly easy to prove or disprove -- unless evidence has been destroyed. If a double-dipping scheme took place or if securities provided were different than indicated, the process either did or did not violate deal covenants. There's not a great deal of gray area allowed when actual money changes hands. We aren't merely talking about insurers claiming they didn't have all the information they needed; we're talking about insurers claiming that deal documents specified that funds should have been provided to them that these Bear execs kept for their bank, or that the securities sold did not adhere to the criteria deal documents specified.

Keep your eye on this case. If criminal charges are brought against these former Bear traders, then that would be pretty huge news. Even if they aren't convicted, criminal charges could be enough to tarnish their reputations, which by the look of their current jobs, still appear to be well intact.