Senator asks Justice, SEC to probe Bear trading

WASHINGTON (Reuters) - A Democratic senator said on Thursday that he was asking the U.S. Justice Department and the Securities and Exchange Commission to investigate stock trading prior to JPMorgan Chase's (JPM.N) agreement to buy Bear Stearns BSC.N in a deal engineered by the Federal Reserve.

"Congress must continue to look into this deal and possible illegal behavior," said Montana Sen. Jon Tester.

"I am calling on the proper law enforcement authorities to investigate whether illegal insider trading may have fueled Bear Stearns' downfall," the first-term member of the Senate Banking Committee said in remarks on the Senate floor.

Tester said he was asking the Justice Department and the SEC to investigate and report on "the role that short selling played in the events surrounding Bear Stearns' collapse."

Last week, Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, urged scrutiny of whether short sellers and speculators contributed to Bear's sudden downfall.

At a committee hearing, SEC Chairman Christopher Cox stopped short of confirming an agency probe, but pledged that any necessary enforcement action would be taken.

Cox told lawmakers their hopes for an inquiry into rumors of illegal trading would be "met and exceeded."

Trading in Bear shares spiked in the days before the buyout of what was once the fifth-largest U.S. investment bank.

Bear told the Fed on March 13 that the company would have to file for bankruptcy the next day if it could not secure financing. On March 14, the Fed and JPMorgan announced emergency financing and, two days later, JPMorgan agreed to buy Bear.

The Fed, with the support of the Treasury Department, provided $29 billion of financing in the deal and took control of $30 billion of Bear's less liquid assets -- a highly unusual government intervention to rescue a Wall Street bank.

"We must learn if the Federal Reserve has acted properly," Tester said. "We must be certain that taxpayers did not post a preemptive bailout to cover massive short selling for those to make money in the markets."

(Editing by Lisa Von Ahn)