A US District Court has convicted Bear Stearns, a major stockbrokerage firm on Wall Street, of five separate offenses involving fraudulent and negligent representation regarding ClearData Communications in 2000. As a result of this jury verdict, Bear Stearns will pay approximately $10 million in damages to potential ClearData investors who forfeited shareholder rights to the internet company at the advice of Bear Stearns.
According to the lawsuit, a group of entrepreneurs had sold their Internet service provide companies to ClearData, in hopes of building a nationwide provider. These entrepreneurs were expecting a lucrative public offering. Bear Stearns brought in a special team of bankers to address the group. The Bear bankers convinced the group to forfeit special put rights to a $13 million payout if the stock offering was not completed. At a meeting, Bear banker Wayne Stoltenberg advised the business owners that surrendering these rights would help the company complete its financings.
Based on the convincing argument made by Bear Stearns representatives and the assurance that an IPO was in the works, the business owners gave up their "put" rights. ClearData filed for bankruptcy in December 2000.
According to attorney Tom Brown, who represented the aggrieved business owners, it was not difficult to prove that Bear Stearns committed fraud. "We got Bear executives to acknowledge under oath that they knew the private-equity raising was going badly and they there was no real plan to do an IPO," says Brown. During the meeting with the business owners, says Brown, Bear representatives knew there was no IPO deal in the works.
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