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NYC to probe if Bear Stearns deceived investors

NEW YORK (Reuters) - New York City’s comptroller, who helps oversee the city’s pension funds, on Tuesday said he will investigate whether the failure of Bear Stearns & Co was due to miscalculation or deception, which could trigger a lawsuit to recover losses.

A Bear Stearns sign is pictured at its office in Hong Kong's Central district March 17, 2008. REUTERS/Victor Fraile

The drop in Bear Stearns’ share price has resulted in a loss for the city’s public pension funds of about $10 million, City Comptroller William Thompson told Reuters in a phone interview.

“I think a lot of people are going to be taking a look. ... Was there some deception in there or was this just a miscalculation?” Thompson, a Democrat, said when asked about a possible lawsuit against Bear Stearns.

Massachusetts on Monday had said it was reviewing whether to sue Bear Stearns to recover money it lost as a result of the plunge in the investment bank’s stock.

Bear Stearns' market value fell after the bank on Sunday agreed to be bought by JPMorgan Chase JPM.N at a price of $2 a share. On Friday Bear Stearns' stock had closed at $30.85. The shares on Tuesday closed up 22.9 percent at $5.91, suggesting some were closing out short positions or believe the firm could fetch a higher price.

New York City's pension fund has a long history of suing companies it believes defrauded investors. The $110 billion fund Thompson helps run is currently the lead plaintiff in a class-action suit against top U.S. mortgage lender Countrywide Financial Corp CFC.N.

Thompson, a possible mayoral contender, said he does not believe Bear Stearns should be immediately kicked off the city underwriting teams.

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“Bear had a very good municipal department,” which came up with some innovative ideas, he said. “It’s not just the firm, you also look at the personnel and the people who are there,” he said, noting JPMorgan also underwrites city debt.

Bear Stearns’ swift descent underscored the fragility of Wall Street companies whose profits have been badly side-swiped by subprime losses, financial analysts said.

Though New York City’s tax revenues are dependent on Wall Street’s performance, Thompson said the real estate market remains solid and tourism is vibrant, thanks to the weak dollar.

Financial workers make up about 11 percent of the city’s private employment base, and their average salaries top $200,000 without including often generous bonuses. As a result, the taxes paid by these employees and their companies often make the difference between a lean or flush year for the city.

The state Democratic Assembly wants to increase income taxes on the 70,000 millionaires who work in the state, who earn at least $20,000 a week. That could hit the banks and brokers particularly hard.

Thompson, however, asked if he backed the Assembly’s tax hike, said, “I would say right now it is probably more prudent to look to reduce the spending that’s been proposed and to try and live within one’s means before we look to increase taxes of any kind.”

Mayor Michael Bloomberg wants to cut $1.42 billion from the current budget and next year’s accord, steps Thompson saluted. The mayor, an independent, will finish his second and last four-year term in 2010.

Editing by Leslie Adler