Bear Dodges Bullet, Wins Battle Over Collapsed Hedge Fund

Jun 30 2008 | 2:33pm ET

Bear Stearns will not have to pay more than $140 million to investors in a failed hedge fund that it served as prime broker, a jury has ruled.

The collapsed investment bank, which was purchased earlier this year by JPMorgan Chase, should not be held liable for failing to discover fraud on the part of hedge fund manager Michael Berger and his Manhattan Investment Fund in the late 1990s. The verdict from an eight-member jury in Manhattan federal court overturns a bankruptcy court ruling last year, which ordered Bear to pay at least $125.1 million for failing “to act diligently and in a timely manner.”

Berger’s malfeasance came to light after MIF collapsed in 2000—costing investors more than $400 million—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 trustee Helen Gredd, who was seeking to recoup investor money. According to U.S. Bankruptcy Judge Burton Lifland, Bear should have known about the fraud as early as December 1998.

Bear appealed that ruling, and a trial was ordered. On Friday, after a nine-day trial, the jury found that Bear was diligent in its inquiries into MIF in 1998 and 1999.

At the trial, former Bear prime brokerage executive Fred Schilling testified MIF’s claims that it was up 20% at a time that its Bear accounts were down $190 million “made perfect sense,” and that the firm was a “client from heaven.”

“With the information I had, that Ernst & Young was a third-party administrator, and there were other prime brokers involved, it made perfect sense,” Schilling told the court. In fact, MIF had no other prime brokers.

In addition, Schilling told the jury that MIF did nothing that might raise a prime broker’s eyebrow, such as missing a margin call.

“There are a lot of hedge funds, you ask them for money, they hang up on you,” he testified. “This fund always sent in collateral when you asked.”

Berger pleaded guilty to overstating both the performance and asset level of MIF in 2000, but fled before he was sentenced. He was arrested in his native Austria last summer.

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    One of the most unique charity benefits in the hedge fund industry, A Leg To Stand On's (ALTSO's) Hedge Fund Rocktoberfest - NYC, raised nearly $500,000 last Thursday thanks to the generous support of major sponsors and nearly 1,400 attendees from the Tri-State finance, business and hedge fund communities. Read more…