Bear Stearns Securities Corp. is being ordered to pay over $125 million to a bankruptcy trustee because of Manhattan Investment Fund, a collapsed hedge fund used by hedge fund principal Michael Berger to run a large scale fraudulent investment scam. The ruling was issued on February 15 by the U.S. Bankruptcy Court for the Southern District of New York.
Berger, who was a fugitive and a convicted felon, had created and used the fund through his company, Manhattan Capital Management Inc., to engage in fraud-an action that led to a number of regulatory and criminal actions. The SEC had even filed a securities fraud complaint against MCM, Berger, and Manhattan Investment Fund in January 2000, even obtaining an asset freeze. Two months later, Helen Gredd, the fund’s receiver, filed for Chapter 11 bankruptcy on the fund’s behalf.
According to the court, the fund made 18 transfers, worth approximately $141.4 million in total, in the year before filing for bankruptcy. Funds were transferred from Bank of Bermuda to a Bear Stearns-maintained account with Citibank. The funds were then transferred to a Bear Stearns account and used for securities trading.
Bear Stearns had put the fund on “closing only” status in January 2000-which meant that no new positions could be opened, until existing positions were closed out, and no money could be withdrawn. After Berger confessed to fraud, Bear Stearns closed out any remaining short positions in the account, using money in the accounting to complete the process.
In acting as the fund’s main broker, said Judge Borton Lifland last January, Bear Stearns had facilitated short-selling activities over the last several months of the fund’s operations. Lifland granted the motion by the trustee for summary judgment in her efforts to recover $141.4 million in margin payments that were deposited into Manhattan Investment Fund’s account at Bear Stearns. Lifland says that Bear Stearns clearly was “on inquiry notice of Berger’s fraud” before the fund’s collapse” and neglected to act diligently and in a timely fashion. Lifland also says that Bear Stearns made about $2.4 million in revenues for services to the fund.
Because Bear Stearns had complied with the trustee’s request to wire $16,288,846.46, which was what remained in the fund’s account, to the fund’s bank account with Chase Manhattan, the final judgment earlier this month was directed that amount, which Bear Stearns had given back to the trustee prior to litigation be subtracted from the $141 million amount so that there would be no double recovery.
Shepherd Smith and Edwards represents clients who have been the victim of securities fraud. To schedule a free consultation, contact Shepherd Smith and Edwards today. We have offices in New York, Phoenix, San Francisco, Chicago, Dallas, New Orleans, Houston, and Mexico City.
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