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Markstone has reached an agreement with New York state prosecutors, under which it will pay a fine but be allowed to continue operations, sources near the private equity fund say. Markstone's former chairman Elliot Broidy confessed two months ago to bribing four top New York officials to invest city workers' pension money in Markstone.

The fund will pay out of the millions in management fees it has charged, and in any event investors and their investments will not be compromised. Knowledgeable sources say that negotiations are at an advanced stage, and an agreement is expected to be signed within 48 hours.

One source close to the fund said that some of its investors, which likely include the State of New York's pension fund, are waiting to hear the details of the agreement before deciding whether to withdraw their investments. Investors are seen as likely to stay on board with the fund if the agreement with the attorney general entails payment out of the fees it has collected.

The bribes that Markstone's former chairman admitted to led to a $250 million investment in the fund. Broidy was forced to resign as Markstone chairman on admitting to the affair. However, the majority of investors are said to believe that the fund's managers in Israel, Ron Lubash and Amir Kess, who hurried to disassociate themselves with Broidy's actions, were unaware of his wrongdoing.

Under the agreement between Broidy and the prosecutor's office, Broidy has agreed to repay $18 million of the management fees he received from the fund over the past few years. The fund has raised a total of $80 million and paid its managers 2% in annual management fees. Based on these figures, Markstone has paid out a total of $80 million, half of which went to Broidy, while the rest was distributed between Kess and Lubash, and used to cover the fund's expenses.

Lubash and Kess have appointed Danny Gillerman, an industrialist and former Israeli ambassador to the United Nations who is respected in influential circles in the U.S., to serve as the fund's chairman and soothe the ruffled feathers of investors and U.S. officials.

Markstone is one of the largest funds operating in Israel. To date it has invested about $600 million, and cashed in on the profits of some of its investments, like Golden Pages. One of the fund's failures was the establishment of Prizma investment house.