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A jury should decide whether Bear Stearns & Co. violated securities laws when it cleared trades for a manipulator of biotechnology shares. Judge Robert W. Sweet of the Southern District of New York has rejected motions for summary judgment by Bear Stearns and a second firm, ruling that a trial will be held in a $77 million class action brought by people who invested their money with David Blech, a stock trader and financier. The judge said there were genuine issues of material fact as to whether Bear Stearns actually participated in the fraud conducted by Blech beginning in 1993, or whether the brokerage house merely processed trades. Sweet also found a jury should decide whether a second firm, Baird Patrick & Co. should be found liable in In Re: Blech Securities Litigation, 94 Civ. 7696. Five years after civil actions were filed in the case, Blech pleaded guilty to fraud charges in 1999, admitting to cheating investors through a series of manipulations that included “parking” shares in accounts and trading between accounts to help support the price of shares that were not being traded in the open market. Among the allegations made in the lawsuits was that Bear Stearns knew Blech was involved in these activities, but nonetheless pushed him to make the trades to meet a series of margin calls with the brokerage house. Baird Patrick also was accused of being part of the “parking” of shares. Judge Sweet said the U.S. Supreme Court has held that “secondary actors cannot be held liable for aiding and abetting a securities fraud under Section 10(b)” of the 1934 Securities Act. But the Supreme Court, he said, has also made it clear that such “secondary actors” are not always immune from liability. If it can be proven that Bear Stearns employed a “manipulative device,” he said, the company could be found to have crossed the line from aiding and abetting to “primary liability.” PROTECTING THE PUBLIC Recounting the facts as alleged, Judge Sweet said it remained an open question whether Bear Stearns was innocently monitoring Blech’s trades out of simple concern for his precarious margin position, or whether the brokerage house helped Blech trade with himself to help keep the biotech shares off the market, where their value might plummet. “As Bear Stearns has demonstrated, margin calls by a clearing broker or a failure to make margin calls, even with suspicion or knowledge of impropriety on the part of the initiating broker, is an appropriate and essential part of the securities business,” Sweet said. “However, a margin call made with knowledge that it will cause the initiating broker to commit a securities fraud which must be cleared by the clearing broker, constitutes direct action in connection with a contrivance to manipulate a security.” While Sweet called it a “difficult assessment of liability stemming from the distinction between aiding and abetting and direct action,” the judge said that “the line will be drawn with respect to summary judgment in favor of protecting the investing public rather than the clearing broker.” Representing the plaintiffs were Richard Kilsheimer and Robert N. Kaplan of Kaplan, Kilsheimer & Fox; David J. Bershad, Richard H. Weiss and Brian C. Kerr of Milberg Weiss Bershad Hynes & Lerach; and Gilman and Pastor of Saugus, Mass. Dennis J. Block, Michael G. Dolan and Suzanne J. Romajas of Cadwalader, Wickersham & Taft represented Bear Stearns & Co. Stephen B. Wexler of Wexler & Burkhart represented Baird Patrick & Co.

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