NEW YORK (CNNfn) - In what it calls an "emergency enforcement action," the Securities and Exchange Commission Wednesday filed charges of fraud against hedge fund manager Michael W. Berger and two of his companies, alleging that he lied to investors about the fund's worth.|
Manhattan Investment Fund Ltd., a hedge fund organized and managed by Berger, Manhattan Capital Management Inc., an investment adviser firm owned by Berger, and Berger himself have all been charged with hiding losses in excess of $300 million and, at the same time, reporting to investors returns of as much as 27 percent annually, the SEC said in a statement.
In an unusual move, a Federal court judge concurrently ordered a temporary restraining order and preliminary injunctions against Berger and his companies, the SEC said.
Normally, a judge would grant a restraining order first to seize any assets that might be of value, then an injunction once more evidence was compiled against the defendant.
The civil charges were filed in the Southern District Court of Manhattan. No criminal charges have been filed.
The SEC's unusually swift action stem from allegations that Manhattan Investment Fund, an offshore hedge fund that bet surging technology stocks would eventually fall, lost more than 90 percent of its $350 million in assets.
Betting that a stock will fall, known as short selling, can prompt huge losses if the stock continues to gain in price and never declines to the level an investor bets.
The Commission charged that in September 1996, Manhattan Investment Fund under Berger's direction began sustaining losses through short-trades that eventually totaled more than $300 million.
To hide the losses, Berger allegedly created false account statements "that materially overstated the performance and value," of the fund, the SEC said.
The false account statements were also provided to †Deloitte & Touche, the fund's auditors. Deloitte & Touche resigned as auditors of the fund on Jan. 8.
In August 1999, Berger allegedly told investors that Manhattan Investment Fund had a net market value of more than $426 million in assets. "In fact, the fund was never that large and by August, its net value had been reduced to less than $28 million," the SEC said. The fund has about 280 investors.
"We moved quite quickly as we became aware of the circumstances," said Bill Baker, one of the SEC investigators on the case. "There is always a concern in these situations about what assets may be available to liquidate."
Bear Stearns sounds bell
On Tuesday, investment bank Bear Stearns Cos. (BSC) issued a statement indicating it was aware of Berger's allegedly illicit activities and had brought them to the SEC's attention. Bear Stearns said it was "surprised and concerned, when an investor contacted us seeking to verify a reportedly strong performance for the fund, where our reports have, for the last few years, indicated significant losses."
Bear Stearns subsequently contacted the 29-year-old Berger, an Austrian national who lives in New York. When Berger opted not to reconcile records for the bank, it brought the discrepancy to the attention of the SEC. "Bear Stearns is continuing to assist the SEC in its review of the Manhattan Investment Fund," the bank said in its statement.
Manhattan Investment Fund was an account initially introduced to Bear Stearns through broker dealer Financial Asset Management. Bear Stearns routinely sent daily and monthly activity reports to Manhattan Investment Fund and to Berger.
The next step, according to the SEC, is for a federal judge to appoint a receiver to divvy up any assets the fund has back to its investors. Both companies and Berger have consented to the relief imposed, the SEC statement said.
Awaiting a receiver
"Our hope would be that once the process is completed, the receiver would run the fund for as long as it's around, which I assume wouldn't be much longer, and ensure that any assets are sold to redistribute to the investors who lost money," the SEC's Baker said.
That doesn't rule out any criminal action taken by the Justice Department against Berger or his two companies. It also leaves open the potential for individual suits against Berger and his fund, or a class-action suit on behalf of the fund's investors, according to people familiar with the investigation.