Bear Stearns' $2 Million Harassment Payout

As Bear Stearns crumbled, The Daily Beast's Charlie Gasparino has learned, the firm’s CEO had another crisis: a sexual harassment accusation against legendary chairman Ace Greenberg that resulted in a $2 million payoff.

In one of his last acts as CEO of Bear Stearns, James Cayne made a payment of around $2 million to a woman who was poised to file sexual harassment charges against its legendary chairman, Alan “Ace” Greenberg, The Daily Beast has learned.

The allegations, which centered around “inappropriate touching,” according to people with direct knowledge of the matter, didn’t result in a lawsuit. Instead, reeling from the bad press of the firm’s role in the burgeoning financial crisis, Cayne settled the matter with the woman, a much younger employee who worked in sales capacity, and who had initially demanded a much higher payment. The employee also claimed to have had a witness to this behavior. In an interview, the 81-year-old Greenberg said, “I can’t comment on something as ridiculous as this.” When given another opportunity to comment on either the unproven allegations or whether the payment was actually made, Greenberg said, “I’m not going to dignify” the matter with a response. He referred to the entire issue as “bullshit,” and said my sources were “pathological liars.” When asked again to say whether the allegations were accurate or the payment had been made by Bear, he said, “I’m not going to comment.”

Cayne settled the matter with the woman, a much younger employee who worked in sales capacity, and who had initially demanded a much higher payment. The employee also claimed to have had a witness to this behavior.

When asked for a comment on behalf of Greenberg and the firm, a spokesman for J.P. Morgan (which purchased Bear Stearns in 2008) said the firm had no comment.

The quick settlement of the matter by a firm legendary for fighting claims made by employees and regulators underscores the pressure faced by Bear at the time the allegations were made. By mid 2007, Bear Stearns became the poster child of the burgeoning financial crisis after it was forced to close down two hedge funds packed with risky debt tied to sub-prime mortgages. Throughout the year, investors openly worried about the firm’s survival as an independent entity as its stock fell from its once lofty share price.

The turmoil led to the forced resignation of longtime president Warren Spector who was head of the bond department and asset management unit that was in charge of the hedge funds. Criminal charges were ultimately filed against the hedge funds’ managers for misleading investors.

Cayne, himself, became the focal point of much of the controversy after press reports that he was playing too much golf and bridge while the firm teetered and one report that he smoked pot, which Cayne denied. The controversy surrounding his management of the company ultimately led to the Bear Stearns board to seek a replacement in December 2007. In March 2008, Bear Stearns became the first casualty of the financial crisis when the federal government guaranteed billions of dollars in toxic debt on its books that led to its downfall and then arranged the sale of the firm to J.P. Morgan. Cayne resigned as CEO in January 2009, months before the firm imploded and was sold to J.P. Morgan for a mere $10 a share. A year earlier, Bear’s stock traded at around $170 a share.

Greenberg, the former CEO of Bear who Cayne replaced in 1993 as CEO, is a titanic figure on Wall Street. Known for his bow ties, performing “magic” tricks at work, and being a savvy trader, Greenberg is widely credited for building Bear Stearns into a major Wall Street investment bank during his 59 years at the firm.

The implosion of Bear, though now more than a year old, and eclipsed by the broader financial crisis that led to destruction of Lehman Brothers and Merrill Lynch and nearly toppled banking giants Citigroup and Bank of America is still it’s likely to remain in the news thanks to at least two books that will chronicle the firm’s fall, and one authored by Greenberg himself.

In October, Greenberg is scheduled to publish his own account of the firm’s tumultuous times in The Rise and Fall of Bear Stearns, which is expected to take shots at Cayne, Greenberg’s one-time protégé who later became a bitter enemy.

In the interview, Greenberg said the book will focus on how he came to work at Bear as a clerk in the late 1940 and his long career building into one of the biggest Wall Street firms. “I want to tell the story about how the firm grew,” he said.Greenberg said he will also chronicle the firm’s now infamous downfall. When asked if he will delve into his tumultuous relationship with Cayne, he said “not really…I will just give the facts.”

Charles Gasparino is CNBC's On-Air Editor and appears as a daily member of CNBC's ensemble. He is a columnist for the Daily Beast and a frequent contributor to the New York Post, Forbes, and other publications. His forthcoming book about the financial crisis, The Sellout, is scheduled to be published later this year.