Bear Stearns Implicated in Investors'
Lawsuit
The investment bank denies improper activity in a fraud case.
By Robert Kowalski
Staff Reporter
Hedge fund Moore Capital Management was able to pull its $20 million investment out of Manhattan
Investment Fund last year -- months before the fund collapsed -- because it got an inside tip that the
fund was a massive fraud, new court documents claim. The tipster? Investment bank Bear Stearns
(NYSE: BSC - news) , according to the documents.
Bear, which was Manhattan Investment's clearing broker at the time, advised Moore Capital
managing partner Zack Bacon that the fund was a "Ponzi scheme," just as Moore was preparing to
invest an additional $4 million, according to the filing. The tip allowed Moore to recoup its full
investment and left hundreds of other investors with more than $400 million in losses when
Manhattan Investment was shut down by the Securities and Exchange Commission in January and
forced into receivership, the court filings state.
And Moore Capital wasn't alone, according to the amended complaint filed last month in a lawsuit
filed by Cromer Finance , a group of former Manhattan Investment investors who claim they weren't
among those who Bear warned to get out.
Bear also tipped off European investment manager Arpad "Arki" Busson, known in celebrity circles
as the husband of model Elle McPherson . The tip allowed Busson to pull $20 million to $25 million
he invested in the fund for clients of his firm, European Investment Managers , Cromer says in the
suit.
And Bear had a reason to help. EIM frequently steers its clients to Bear, and Moore Capital is a
Bear client, according to the suit.
Nothing Improper
Bear says it did nothing inappropriate. "We categorically deny any improper activity. We did not
know of the fraud," says spokeswoman Hannah Burns. "When we began to see signs that there was
a problem, without hesitation we reported the matter to the SEC."
Bacon, at Moore Capital, wouldn't comment on the suit. Moore Capital legal counsel Steve Nelson
says the firm doesn't comment on litigation.
Manhattan Investment, which once managed nearly $600 million for investors, is now in bankruptcy
proceedings. Its former manager, 28-year-old Austrian Michael Berger, was indicted in August by
the U.S. attorney in Manhattan and charged with securities fraud that led to the loss of more than
$400 million for the fund's investors between 1996 and 1999.
Berger faces up to 10 years in prison and $1.25 million in fines on the charges.
The SEC also charged Berger with securities fraud in an emergency enforcement action that shut
down the Manhattan Investment in January. His attorney didn't return a phone call.
Blame the Accountants, Too
In its latest filing in the case, in which class-action status is being sought, Cromer Finance claims the
accounting firms Deloitte & Touche and Ernst & Young also are culpable for Manhattan
Investment's losses. The accounting firms helped mask huge discrepancies between what the fund
was reporting and its actual assets by certifying heavily inflated financial statements, according to the
suit.
For example, Deloitte & Touche reported that the fund had a $19 million increase in net assets in
1998, when it actually lost $200 million, the suit claims.
Deloitte & Touche declined to comment on the Manhattan Investment suit. Ernst & Young, while
saying that its Bermuda division handled Manhattan Investment's fund administration work, says it
was a victim of the wrongdoing at the hedge fund. "Mr. Berger defrauded the professionals as well
as the investors," Ernst & Young New York spokesman Les Zuke says.
But the lawsuit contends with extensive detail that Bear knew how financially unsound the fund was,
and made certain its favored clients got out before the fund imploded.
"Bear Stearns continued to overextend margin credit to the fund, at times in violation of applicable
margin rules, in order to forestall the fund's collapse and keep the fund liquid long enough to enable
those investors to withdraw their money," the suit says. Bear had regularly extended margin, or
loans, to the Manhattan Fund, and often exceeded the amount it was permitted to extend under its
own and the New York Stock Exchange's margin rules, the suit contents.
Self-Interest
Again, the suit contends, Bear had a self-interest in doing so.
In the case of Bacon, the Moore Capital managing partner, his Moore Long/Short Equities not only
was an investor in the Manhattan Fund, but also was a Bear client. Moore's investment adviser,
Tower Capital , also had a business relationship with Bear, according to the suit.
When Bacon sought to remove his firm's investment from Manhattan Investment, Berger refused,
saying there was a 30-day notice requirement to make such a withdrawal. At that point, Bacon's
investment adviser threatened, implicitly, to expose Berger's fraud unless the notice requirement were
waived, and told Berger, "It's best for you personally and generally, if you would waive the notice
requirement for Moore," according to the suit.
Moore Capital, run by well-known hedge fund manager Louis Bacon, had $9 billion under
management as of May, according to a company statement.
Nelson, the firm's counsel, declined to elaborate on the association between Moore Long/Short
Equities Ltd. and Moore Capital.
"We're a private company," he said.
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