SEC probing Bear Stearns speculation

U.S. regulators are investigating whether traders illegally sought to force Bear Stearns Cos. shares into a tailspin last week by spreading false information about the firm’s finances, two people familiar with the inquiry said.

The Securities and Exchange Commission probe is focusing on whether hedge funds or other investors bet on a drop in the company’s shares while spreading rumors that the New York firm was nearing collapse, said the people, who declined to be identified because the inquiry isn’t public.

The New York Stock Exchange’s regulatory arm is also involved in the investigation, the people said.

Speculation about a cash shortage spurred customers and lenders to pull money from Bear Stearns last week, driving the shares down 57% throughout the week. Two days later, the fifth-largest U.S. securities firm was acquired by JPMorgan Chase & Co. for $2 a share.

The company’s decline coincided with a surge in investor bets that the stock price would plunge. The SEC’s probe is unusual because most of the agency’s stock-manipulation cases focus on penny stocks.

The case underscores regulators’ concern that malicious rumors have the potential to fuel market panic and exacerbate shareholder losses on financial stocks.

The SEC on Tuesday said it wouldn’t rule out potential inquiries into the company’s statements in the 60 days before the takeover by JPMorgan was announced.

Although it was “premature” to give assurances to JPMorgan about future probes, the SEC’s enforcement division would “favorably take into account the circumstances” of the acquisition in considering any action, the agency said.