Fund Manager Accused of Fraud
The Manhattan Investment Fund, a hedge fund controlled by Michael W. Berger, was charged by regulators with inflating its assets and returns while losing $300 million by betting against Internet-related stocks.
The Securities and Exchange Commission, in a civil fraud lawsuit filed in a Manhattan federal court, accused Berger and the New York fund of trying to hide losses by sending false account statements to investors. To perpetuate the scheme, they paid investors who redeemed their shares for more than the actual share value, the complaint contended.
“I’m cooperating with U.S. authorities, and my intention is to help the shareholders as much as I can at this juncture,” Berger, a 28-year-old Austrian citizen, said in an interview. He declined to say if he would contest the charges.
The fund, which invests money for 280 wealthy individuals and institutional investors, has raised more than $350 million since September 1996, the suit contended.
The SEC complaint alleged Berger has reported annual gains of between 12% and 27% while actually losing more than $300 million of investors’ money. The losses occurred because he sold Internet-related stocks “short”--betting that the shares would decline--only to have them soar, according to the suit.
“To hide these monumental losses from investors, defendants created account statements that materially overstated the performance and value of the hedge fund,” the suit said. The fund also had its administrator “send false and misleading account statements to investors,” according to the complaint.
The suit, which is seeking fines and refunds, also contends that the fund has less than $50 million in assets. Berger, who founded the fund in 1996, has said he told customers in November that the fund had about $500 million in assets.
The SEC complaint also named Manhattan Capital Management Inc., the fund’s investment manager owned by Berger. Manhattan Capital settled the charges by agreeing to have its assets frozen and to having a receiver run both the fund and its investment manager. It neither admitted nor denied wrongdoing.
Berger, who lives in the New York area, said in an interview last week, “I’ve used very poor judgment. At all times, my intentions were honest.” He sent a Jan. 14 letter to investors reporting that “the fund’s actual net assets are substantially less than those previously reported.”
Also today, Bear Stearns Cos., a brokerage that cleared trades for Manhattan Investment Fund, said it contacted the SEC after finding that Berger reported gains to his investors while losing money on his trades.
The fund’s auditors, the Deloitte & Touche accounting firm, withdrew its approval of financial reports for 1996 to 1998. The administrator of the fund, an Ernst & Young LLP affiliate, said last week it resigned because the fund misrepresented its assets.
Bank Austria also sued Berger on allegations he defrauded Austria’s largest bank out of $28 million with bogus claims about his fund’s returns. The suit, filed in New York State Supreme Court, contended that the Justice Department also is investigating Berger’s actions.
Berger’s market forecasts have been consistently wrong. He wrote in a Nov. 4 newsletter that “in all likelihood, the Dow should fall below the psychologically important 10,000-point mark” by the end of the year. Instead, the Dow Jones Industrial Average finished at 11,497.
Berger came to the U.S. in 1993 from Austria, where he was managing money at a Salzburg savings and loan. Before opening the Manhattan Investment Fund in April 1996, he managed money for wealthy individuals, he has said. He writes “Wall Street Notes,” a financial newsletter.
