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Bear Stearns Investors Make Bank?


A secret settlement bails out Massachusetts hedge-fund holders.

In Massachusetts, it apparently pays big to be very, very wrong.

A select group of Massachusetts investors are recouping every penny they lost when 2 now-defunct Bear Stearns hedge funds collapsed in June 2007, the Daily Beast reports.

In November, William F. Galvin, secretary of state for Massachusetts, secured a $9.3 million confidential settlement with JPMorgan (JPM), whereby hedge-fund investors would receive 100 cents on the dollar of their original investment. Checks -- some for a cool $1 million -- were sent to these lucky few in December, just in time for Christmas.

One lawyer for JPMorgan was quoted as saying that Galvin "put a gun to our head" to secure the deal.

Predictably, the settlement has investors unlucky enough to live in other states up in arms, since many lost all or most of their original outlay. And even in Massachusetts, no payouts will be made to former Bear Stearns employees, regardless of how much money they lost. Some have darkly speculated that this is because the firm is eager to mend fences with those who might someday be clients - former employees be damned.

In the fall of 2007, Bear Stearns, hoping to avoid future litigation, made a number of preliminary settlements with investors. According to the terms of that deal, those who invested in the hedge funds in May or June 2007 would recoup their entire investment; those who invested between January and April 2007 would recoup two-thirds; and those who invested before January 2007 would recoup one-third.

Ralph Cioffi and Matthew Tannin -- the men who managed the funds in question from their launch in 2003 until their collapse in 2007 -- were indicted in June of last year on charges of conspiracy, wire fraud and securities fraud. (As early as mid-2006, Cioffi was barred from trading with Bear Stearns affiliates due to his repeated code violations.) The trial will begin in the Eastern District of New York later this year.

Why JPMorgan Chase agreed to the settlement -- and whether other states will follow Massachusetts in filing suit -- remains to be seen.
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