Bear Stearns Ordered to Pay $125 Million

Judge Cites Firm for Lax Oversight in Collapse of Manhattan Hedge Fund

Bear Stearns must pay at least $125.1 million to a failed hedge fund after a court concluded the securities firm ignored signs that investors were being defrauded and took money to cover its own potential losses.

U.S. Bankruptcy Judge Burton Lifland in New York yesterday ordered that Bear Stearns must return the money to Manhattan Investment Fund, which collapsed in 2000 after regulators accused the manager of sending fake account statements for more than three years.

Bear Stearns, alerted to the fraud as early as 1998, waited a year before scrutinizing the hedge fund's books and learning its true financial condition, Lifland wrote.

The delay allowed Manhattan Investment to continue cheating investors, who lost almost $400 million, according to regulators. The ruling against Bear Stearns, of New York, may spur investment banks to monitor hedge funds, their most lucrative trading clients, more closely. Bear Stearns is one of the biggest brokers to hedge funds.

Hedge funds are lightly regulated investment pools that allow managers to keep a substantial portion of gains they generate for clients. Hedge funds have resisted government efforts to make them disclose more about their operations.

"These are issues that the hedge fund industry wants to go away, but they're not going to," said Seth Berenzweig, a partner at Albo & Oblon, a law firm in Arlington.

For Bear Stearns, a $125.1 million payment is equivalent to 6 percent of its $2.05 billion profit last year. Bear Stearns spokesman Russell Sherman said the firm will appeal.

Manhattan Investment, founded in 1996 and managed by Michael Berger, imploded into bankruptcy four years later in "one of the most egregious and costly frauds in the history of the securities markets," the SEC wrote in a bankruptcy court filing submitted last year.

Berger deceived investors for more than three years with fake account statements, said the SEC, which sued Manhattan Investment for fraud in 2000. Berger pleaded guilty to related criminal charges and then left the country before sentencing.

"Bear Stearns was required to do more than simply ask the wrongdoer if he was doing wrong," Lifland wrote.

"This is going to send shock waves through many prime brokers because they've been very careful to limit their responsibility for their customers' actions," said Michael Missal of Kirkpatrick & Lockhart Preston Gates Ellis in the District.