Bear To Cough Up $125M In Hedge Fund Fraud Case

Feb 15 2007 | 12:02pm ET

In a decision that could send shockwaves through the prime brokerage industry, a federal judge has ordered Bear Stearns to pony up $125.1 million to a failed hedge fund’s clients. Last month, the judge found that Bear had failed to adequately investigate what later turned out to be fraud on the part of its client, Manhattan Investment Fund, whose manager allegedly bilked clients out of some $400 million.

Instead, Judge Burton Lifland said last month, Bear, one of Wall Street’s largest prime brokers, was trying to limit its own losses. “Bear Stearns failed to act diligently in a timely manner,” Lifland said in a Jan. 9 opinion, noting that when Bear finally did take a look at Manhattan’s financial statements a year later, it took “a 10-minute review” to determine that manager Michael Berger had been lying to them.

“Bear Stearns was required to do more than simply ask the wrongdoer if he was doing wrong,” Lifland ruled. “Diligence requires consulting easily obtainable sources of information that would bear on the truth.”

Berger’s malfeasance came to light after it collapsed in 2000 and the Securities and Exchange Commission sued it for fraud. At the time, the SEC called the Manhattan case “one of the most egregious and costly frauds in the history of the securities market.” Since then, Bear has been battling the trustee seeking to recoup investor money. According to Lifland, Bear should have known about the fraud as early as December 1998.

The decision could have big implications for prime broking, for, as Bloomberg News reports, Bear’s brokerage agreement with Manhattan was standard for the industry.

Things could be worse for Bear: The firm had faced returning up to $180 million.


In Depth

Q&A: High Conviction, Low Correlation

Oct 30 2014 | 7:35am ET

Acadian Asset Management's numbers are big: over $70 billion in assets under management...

Lifestyle

Ex-Hedgie Steyer Gives $56M To Climate Action Super PAC

Oct 28 2014 | 9:23am ET

Retired Farallon Capital founder Tom Steyer has poured almost $56 million into his...

Guest Contributor

Hedge Funds Weather A Data Management Perfect Storm

Oct 22 2014 | 12:28pm ET

From a regulatory standpoint, nearly every development since the crisis has placed...

 

Videos

Editor's Note

    Guidelines for Guest Articles

    Oct 22 2014 | 9:46am ET

    We are always looking for guest articles from hedge fund managers and buy-side firms.

    If you are interested in submitting a contributed piece for possible publication on FINalternatives, please take a look at the specs. Read more…

 

Futures Magazine

October 2014 Cover

Demeter: Family affair

David and James Hamman launched their fundamental Livestock and Grains Program in March of 2010 but it really was decades in the making.

The Alpha Pages

TAP July/August 2014 Cover

The Alpha Pages Interview: Senator Rand Paul

Senator Paul sat down in the debut series of the Alpha Pages Interview to discuss the broken tax code, regulation surrounding Bitcoin, and his plans for the 2016 Presidential election.