Bear Stearns to get trial over hedge fund money

NEW YORK (Reuters) - A federal judge says Bear Stearns Cos Inc BSC.N took a number of steps to investigate a fraudulent hedge fund, and a trial should be held as the investment bank battles the bankruptcy estate of the collapsed Manhattan Investment Fund Ltd over about $160 million.

U.S. District Judge Naomi Reice Buchwald in Manhattan on Monday reversed part of an earlier decision by a bankruptcy judge that said Bear Stearns had failed to police fraudulent money transfers in the months before the hedge fund collapsed in the late 1990s.

Bear Stearns did not return calls seeking comment.

Earlier this year, U.S. Bankruptcy Judge Burton Lifland in Manhattan said Bear Stearns must return about $160 million to the bankruptcy estate of the hedge fund run by convicted felon Michael Berger. The decision centered on money that Berger transferred to Bear Stearns from a Bermuda bank, and then used to buy tech stocks.

Lifland's opinion said Bear Stearns had suspicions that Berger was involved in fraud, but didn't act to stop 18 separate transfers totaling $141.5 million in the months before the hedge fund collapsed.

Buchwald, however, disagreed with Lifland, in part.

"Bear Stearns took a number of steps to uncover the truth about the fund," Buchwald wrote.

For example, Bear Stearns contacted the hedge fund's auditors and told them to be aware of potential problems. Bear Stearns also followed up with the auditor, Deloitte & Touche, even though it was under no legal obligation to do so, Buchwald said.

"We find that there are genuine issues of material fact as to whether the proactive steps taken by Bear Stearns demonstrated diligence in its investigation of the fund," the judge wrote. "Thus, trial will be necessary on this issue."

(Reporting by Tim McLaughlin, editing by Gerald E. McCormick)