Bonuses for Bear Lawyers?

If you are wondering how long it will take Bear Stearns to dig itself out of the legal mess its defunct hedge funds created, consider this: it is still defending itself in the courts over another hedge fund debacle from 2000.

Bear Stearns acted as prime broker for the Manhattan Investment Fund, a hedge fund that went bankrupt after betting against internet stocks in 2000. The fund's manager pleaded guilty to misleading investors about the $400 million in losses the fund incurred.

In February, a federal bankruptcy judge ordered Bear Stearns to pay $160 million to investors of the fund for failing to properly monitor its client's activities. Among other things, prime brokers for hedge funds lend stock to their clients to allow them to sell short. Investors claimed that Bear Stearns knew about the fraud at the Manhattan Investment Fund when it accepted $141.5 million from it to cover positions for which Bear Stearns would have been held liable.

Bear Stearns appealed the ruling, and yesterday, it got a bit of good news in the midst of an otherwise dismal week for the bank. A U.S. district judge in Manhattan ruled that a trial will be necessary to determine if Bear Stearns acted in good faith when it accepted the funds transfer.

It is safe to say that Bear Stearns' lawyers are earning their keep these days. U.S. prosecutors and the Securities and Exchange Commission are reportedly investigating whether or not its own hedge fund manager, Ralph Cioffi, withdrew money from two funds before they collapsed this summer. Cioffi left the bank under a cloud of suspicion last week.

At the same time, the bank is reportedly searching for a successor to its embattled chief executive James Cayne.

Bear Stearns could certainly use that $160 million. Tomorrow, the bank is expected to report its first quarterly loss since it went public in 1985.

by Megan Barnett