Photo: Diego M. Radzinschi/ALM

A pair of Bear Stearns-affiliated hedge funds that collapsed in 2008 and sued Reed Smith for taking too long to go after a group of credit-ratings agencies have settled their $500 million legal malpractice case against the law firm.

A representative for Reed Smith said in a statement Friday that "the parties have reached a mutually-acceptable resolution of their dispute and respective claims." Attorneys for the plaintiffs didn't immediately respond to comment requests.

A stipulation of discontinuance with prejudice was filed in the case Wednesday in Manhattan Supreme Court. The details of the settlement were not made public.

The plaintiff funds were deeply invested in subprime residential mortgage-backed securities, or RMBS, and went under during the financial crisis. They went on to sue major Wall Street investment banks that had underwritten the securities and ratings agencies, including affiliates of Moody's, Fitch Ratings and S&P, for allegedly failing to disclose the risks of such investments.

The legal malpractice complaint, filed in January in Manhattan Supreme Court by the funds' liquidators, accused the funds' former lawyers at Reed Smith of pressing forward with a fruitless lawsuit despite having realized months before that they had probably waited too long to sue a group of credit-rating agencies. Reed Smith went on to bill $6 million despite causing its client to lose claims worth at least $500 million, the suit said.

In a January statement about the malpractice accusations, Reed Smith said that despite the firm's analysis of a potential ratings agency suit in 2011, such litigation was not viable at that point for several reasons.

The settlement comes early in the case, before a ruling on a motion to dismiss that was fully briefed in May.

The funds' liquidators were represented by William Reid IV and Marc Dworsky of Reid Collins & Tsai. Reed Smith was represented by Adam Offenhartz and Nancy Hart of Gibson Dunn.