US District Judge Naomi Reice Buchwald in Manhattan said yesterday a "trial will be necessary" to determine whether Bear Stearns acted in "good faith" when it accepted money for a defunct hedge fund.
Buchwald ruled on an appeal of a February order by US Bankruptcy Judge Burton Lifland that Bear Stearns pay nearly $160m to investors in the Manhattan Investment Fund. Lifland had found that Bear Stearns failed to properly monitor the activities of the fund before it collapsed in early 2000.
The fund, run by Austrian-born manager Michael Berger, lost nearly $400m of investors’ money by making wrong bets on Internet stocks during the technology boom of the late 1990s.
The Securities Industry, Financial Markets Association, the Financial Markets Lawyers Group and the International Swaps and Derivatives Association, all supported Bear's appeal.
The fund went bankrupt in 2000 after regulators accused Berger of sending fraudulent account statements. Berger pleaded guilty to criminal charges, but fled the US before sentencing and was captured earlier this year in Austria.
Also yesterday, CNBC's Charlie Gasparino reported that Bear Stearns' board of directors is considering a succession plan for "the first time in years."
Gasparino, citing unnamed sources within the firm, said Cayne's age, health, probes into two hedge funds and Bear's future in mortgage-backed bond trading all contributed to the board's talks. He said president Alan Schwartz is the likely successor.
Separately, Ralph Cioffi, the manager of hedge funds that invested in sub-prime mortgages, has left Bear Stearns amid a probe into whether he withdrew money from two funds before they collapsed in July, Bloomberg reported today.
The US Attorney in Brooklyn and the Securities and Exchange Commission are investigating Cioffi's withdrawal of money from the funds, Bloomberg said, citing three people with knowledge of the matter. The sources said it is part of a broader regulatory review. Investors in the two funds, which filed for bankruptcy in July, lost $1.6bn.
Company spokeswoman Elizabeth Ventura said Cioffi stopped working for Bear Stearns last week, but would not say why he left. A Bear spokesman did not return a message seeking comment on the court ruling and CNBC report.
The Wall Street Journal reported the probe of Cioffi yesterday. He hasn't been accused of wrongdoing by the SEC or the US Attorney.
Bear Stearns expects to report a fourth-quarter a loss tomorrow after writing down $1.2bn in mortgage-related securities.