It's a problem with the 1.02 patch. I've asked Saint to ty and fix it in his high-res patch. There's probably some random string of hex that needs to be adjusted.
Note that the effect still happens (when the screen pans up, you can see it), but for some reason, the front part of the background that we see at first overlaps it.
Also, i'm fairly certain that software mode does not encounter this problem.
This should probably be in GAME TWEAKING, unless someone here can off-hand figure out a solution