By MICHAEL VIRTANEN
Associated Press

ALBANY - The liquidity troubles that struck Bear Stearns Cos. included a ruling from New York's highest court last week that it was responsible for paying most of an $80 million settlement with securities regulators in 2002.

The state Court of Appeals concluded that the investment bank's insurers were not liable for covering $45 million of the cost since Bear Stearns reached the conflict-of-interest settlement without giving them advance notice as required by an "unambiguous" provision of its insurance contracts. The six judges unanimously rejected the argument that the settlement actually happened when approved by a federal court months later.

"Having signed the consent agreement, Bear Stearns was not free to walk away from it before entry of a final judgment," Hon. Victoria Graffeo wrote in the March 13 ruling.

Bear Stearns shares lost nearly half their value Friday after JPMorgan Chase & Co. said it and the Federal Reserve Bank of New York would prop up the troubled company. On Monday, that became a $2-a-share buyout as the Federal Reserve approved Bear Stearns' sale to JPMorgan Chase.

Under the December 2002 settlement with the nation's 10 largest brokerage firms, analysts were barred from being paid for equity research by investment-banking arms and no longer allowed to accompany investment bankers "on pitches and road shows" to lure investment-banking clients.

The Bear Stearns settlement included a $25 million penalty, $25 million disgorgement, $25 million for independent research and $5 million for investor education. It resolved actions by the Securities and Exchange Commission, the New York Stock Exchange and various state regulators, including then New York Attorney General Eliot Spitzer.

Bear Stearns sent letters to its insurers requesting their consent three days after executing the agreement, Graffeo wrote. A few months later, it executed a settlement agreement in the SEC's lawsuit, which was accepted by the U.S. District Court in the Southern District of New York in October 2003.

After Bear Stearns exhausted $10 million in self-insurance, it had another $10 million of coverage with Vigilant Insurance and excess-liability policies with Federal Insurance and Gulf Insurance for $40 million, according to court papers. All required the company not to settle any claim more than $5 million without first obtaining the insurers' consent, Graffeo wrote.

Calls to attorneys for the insurers and Bear Stearns were not immediately returned.