Bear Stearns, which disclosed late last night that profits plunged almost 80 per cent in the three months to February, is under investigation by two of America's top regulators.

The Securities and Exchange Commission (SEC) has opened an inquiry over alleged anti-competitive practices relating to bidding for municipal securities, and the Federal Trade Commission (FTC) has said that the bank broke federal laws which protect consumers.

Bear said that it was co-operating with both the SEC and the Federal Trade Commission.

The US investment bank, once the fifth largest in the US before being rescued by JP Morgan, said that net income to February dropped from $554 million to $115 million and net revenues were down 40 per cent to $1.48 billion.

The SEC’s action is connected with an ongoing probe into Wall Street firms’ conduct in the municipal securities market stretching back to 1990. Meanwhile, the Federal Trade Commission last month began an investigation into alleged violations of federal consumer protection statutes by EMC Mortgage Corporation, a Bear subsidiary.

The FTC is currently looking to resolve the matter “through consent negotiations” before it proceeds with a formal complaint.

Bear said in its public filing to the SEC: “The activities at issue in these industry-wide government investigations generally concern the bidding process for municipal derivatives that are offered to states, municipalities and other issuers of tax-exempt bonds.

“Bear Stearns has cooperated, and continues to cooperate, with the DOJ [Department of Justice] and the SEC.”

The company was hit hard by the sub-prime mortgage crisis last summer and by the continuing liquidity shortage in the debt markets.

Bear Stearns was forced to seek emergency funds from JP Morgan Chase and the Federal Reserve on March 14.

Just three days later, JP Morgan made an offer of just $2 a share to take over the investment bank but subsequently upped its bid to $10. The deal is currently pending approval by shareholders and is expected to be completed by the end of June.

Bear said in its SEC filing that employees were struggling to steady the ship in the wake of such “extraordinary events”.

“Human error in times of extreme difficulty and turmoil, such as the company recently experienced and continues to experience, can occur,” it added.

"Moreover, control and process breakdowns may be more frequent when a company is operating under duress and its employees become distracted by crisis management and the uncertainty surrounding the viability of the enterprise.

“These events and potential impacts may have had and may have an adverse impact on the efficacy of our disclosure controls and procedures and our internal controls over financial reporting.”

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