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.


In Depth

Why Ponzi Schemes Work: An In-Depth Look At The Allen Stanford Fraud

Dec 21 2014 | 10:30am ET

Texan Allen Stanford first appeared on the radars of financial regulators in 1997...

Lifestyle

Cooper-Hohn Won't Contest Divorce Settlement

Dec 18 2014 | 9:51am ET

The ex-wife of hedge fund billionaire Christopher Hohn will not contest a divorce...

Guest Contributor

Alternative Investment Funds Face A Communications Imperative

Dec 19 2014 | 6:10am ET

A handful of the top alternative investment firms on both sides of the Atlantic...

 

Sponsored Content

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

December 2014 Cover

Futures 2014 person of the year

Jeff Sprecher was simply looking for a platform to trade energies when launching ICE 14 years ago but it has grown to reach the pinnacle of both the listed futures and equities world.

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.