Bailing Out of Bear

Star broker Douglas Sharon's story paints a vivid picture of the desperate last days of Bear Stearns

Many of Sharon's clients and their roughly $1 billion followed him to Morgan Stanley Porter Gifford

by Michael Orey

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Many of Sharon's clients and their roughly $1 billion followed him to Morgan Stanley Porter Gifford

"I had flashes of losing it all," says Ritchie, a retired entrepreneur and Sharon client Jeffery Salter/Redux

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As chaos rocked Bear Stearns (BSC) during the weekend of Mar. 15-16, one of the investment bank's star brokers prepared to bolt from its Boston office. The Federal Reserve and JPMorgan Chase (JPM) were rushing to rescue Bear. But Douglas A. Sharon didn't wait around to see how it all came out. Surveillance cameras captured the 50-year-old veteran and an assistant toting two boxes out of Bear's downtown building. Earlier, Sharon had frantically called dozens of skittish clients and tried to sort through the mess with other executives at the branch. "It was like the fall of Saigon in the office that weekend," says a Bear broker in Boston.

The company alleged in a lawsuit that amid the mayhem, Sharon committed an unlawful act of disloyalty, stealing copies of confidential account documents and, more important, the lucrative clients who went with that paperwork. Sharon denied any wrongdoing, countering that his actions amounted to client triage, not treachery. A judge found no merit to Bear's claims.

The two sides continue to duke it out in arbitration, but the blow to Bear has already been dealt. With Bear and JPMorgan trying to prevent a mass client exodus, almost all of Sharon's 90 or so customers—and their roughly $1 billion—have moved to his new employer, Morgan Stanley (MS). Documents and testimony from the legal scuffle offer a rare behind-the-scenes look at Bear's final days, as employees and clients alike scrambled to get out with as much of their money as they could. Bear says it is taking "appropriate steps to ensure employees adhere to their contractual obligations." JPMorgan declined to comment.

Sharon was recruited more than two decades ago from a rival brokerage by none other than James Cayne, then co-president of Bear and now the devastated bank's chairman. The two men hit it off so well during the initial interview that Sharon accompanied Cayne when he left the meeting to attend a funeral. By 2008, Sharon was one of the firm's top performers in private banking, controlling around $1 billion in assets and generating more than $5 million a year in commissions.

His objective for clients' money: Keep it safe. A fixed-income specialist who invested in low-risk corporate bonds and Treasuries, Sharon has described himself as "the guy who handles [clients'] Rock of Gibraltar safe money." Alan Ritchie, a 67-year-old former Boston-area manufacturing entrepreneur who now lives in Palm Beach Gardens, Fla., parked a substantial part of his assets with Sharon after he retired: "I'm very conservative. I sold my business and figured if I could get a good return on whatever I had left, that was good enough for me."

A PERFECT FIT?

In 2004, Sharon started moving some of his clients' money into a new Bear Stearns hedge fund that owned mortgage-backed securities, the prosaically named High-Grade Structured Credit Strategies Fund. The investment, which Bear marketed as extremely safe, seemed to be the perfect fit for Sharon's risk-averse strategy. At one investor conference, the fund's co-manager compared the portfolio to a bank account. Sharon sank about $60 million of client cash—as well as $500,000 of his own—into the fund and a related one.

But the two hedge funds turned out to be a dumping ground for risky subprime securities. When they collapsed last summer, helping spark a global credit crisis, Sharon and his clients lost the bulk of their investments in the funds. Furious, Sharon flew immediately to New York to meet with top management at headquarters. Clients are angry, Sharon told them, and they are going to leave.