(April 27 – 16:25 ET) – The trustee of bankrupt hedge fund Manhattan Investment Fund Ltd. is suing brokerage house Bear Stearns for US$1.9 billion.

The suit alleges that the broker likely knew the fund was being run like a pyramid scheme for a year before it came crashing down, causing the loss of US$400 million by 300-odd investors. The firm “only blew the whistle on the manager when the fund’s imminent collapse might have put the brokerage1s own capital at risk,” says the Statement of Claim.

By the end of September 1999, Bear Stearns records showed the fund to be down nearly 1,700% for the year, and a Bear Stearns executive had expressly acknowledged that Berger might be operating a pyramid scheme. But Bear Stearns not only continued to do business with Berger’s fund, but
substantially increased that business, plaintiff alleged in the suit.

The scheme faltered in November 1999, and the manager was forced to start selling stocks to meet margin calls from Bear Stearns. The suit says that when the firm’s own money was at risk it began an investigation, and soon after it called in the Securities and Exchange Commission.

In a statement Bear Stearns stated that “the legal theories presented in the complaint are novel and unsupportable. The trustee seeks to recover 400% of the Fund’s losses from Bear Stearns for providing ordinary margin and stock lending services and for reporting accurately about the Fund’s positions. This is an area that is heavily regulated by federal statute, rule and regulation. If the trustee’s theories
are accepted, they would seriously disrupt the financial markets. We believe that this lawsuit is without merit and intend to defend it vigorously.”

The fund’s manager, Michael Berger, pleaded guilty to fraud charges in November 2000. A hearing for the case has been scheduled for June 6.
-IE Staff


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