Securities and Exchange Commission
Litigation Release No. 16412/ January 19, 2000
SEC Charges Hedge Fund and Its Adviser With Fraud
Emergency Relief Ordered
Securities and Exchange Commission v. Michael W. Berger, Manhattan Investment Fund Ltd., and Manhattan Capital Management, Inc., (Civ. Action No. 00 Civ. 0333 (DLC), Southern District of New York, January 18, 1999)
The Securities and Exchange Commission today announced that yesterday, January 18, 2000, it filed an emergency enforcement action charging Michael W. Berger, a hedge fund adviser, with securities fraud. Also charged were Manhattan Investment Fund Ltd., a hedge fund organized and managed by Berger, and Manhattan Capital Management Inc., an investment adviser owned by Berger. Berger is an Austrian citizen who lives in New York City, where Manhattan Capital is located. Manhattan Investment Fund is a British Virgin Islands corporation. The fund has approximately 280 investors.
Also yesterday, the Honorable Denise L. Cote, United States District Judge entered an order freezing the assets of Manhattan Investment Fund and Manhattan Capital Management. The Judge's order also included a temporary restraining order barring further violations against Manhattan Investment Fund and preliminary injunctions against Berger and Manhattan Capital Management. Currently pending before the judge is the Commission's request for appointment of a receiver for Manhattan Investment Fund Ltd. and for Manhattan Capital Management. Berger and Manhattan Capital consented to the relief imposed.
The Commission charged that beginning in September 1996, Manhattan Investment Fund began to sustain market losses that ultimately totaled more than $300 million. At the same time the fund was sustaining these huge losses, Berger was reporting to investors that the fund had returns of between 12 and 27 percent annually. By August 1999, Berger 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 Complaint alleges the following: Berger organized Manhattan Investment Fund in April 1996. Since then, he has raised more than $350 million from investors. Berger's investment strategy for the fund was based on the proposition that the stock market generally, and stocks of Internet-related companies particularly, were overvalued, and that there would be a market correction in which the prices of many Internet-related stocks would decline sharply. Berger sold these securities short, in order to profit from the anticipated decline. However, because the prices of most internet-related stocks have instead increased dramatically, the Manhattan Investment Fund has consistently suffered losses. Those losses now total in excess of $300 million.
To hide the fund's losses from investors, beginning in September 1996, Berger created phony account statements that materially overstated the performance and value of Manhattan Investment Fund. The information contained in the false account statements was provided to investors in the fund, and was shared with potential investors. The false account statements were provided to the fund's administrator, and to the fund's auditors. Earlier this month, both the administrator and the auditors resigned.
The complaint charges Berger, Manhattan Investment Fund and Manhattan Capital with violations of Section 17(a) of the Securities Act of 1933 and Section10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. Berger and Manhattan Capital are also charged with violations of Section 206(1) and (2) of the Investment Advisers Act of 1940.
In addition to the relief already ordered by the Court, the Commission seeks the following relief: (i) permanent injunctions barring future violations;(ii) disgorgement and prejudgment interest; and (iii) civil penalties.
The Commission's investigation into these matters is continuing.