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Austrian-born hedge fund manager Michael Berger was hit Thursday with securities fraud charges in connection with losses of $400 million suffered by at least 300 investors in his Manhattan Investment Fund Ltd. The U.S. Attorney’s office in Manhattan also charged Berger, 28, with fraud under the Investment Advisers Act. Smiling and winking, Berger appeared at a court hearing where he waived his right to indictment by a grand jury, an indication that he is cooperating with federal prosecutors. U.S. magistrate Judge Frank Maas ordered Berger released on a $100,000 bond secured by his property in the Hamptons, N.Y., and $75,000 cash. Berger’s lawyer, Sara Mogulescu, from New York-based Morvillo, Abramowitz, Grand, Iason & Silberberg, PC refused to comment. These are the first criminal charges stemming from the multimillion dollar loss in Berger’s British Virgin Islands-based hedge fund. In January, the Securities and Exchange Commission sued him and his companies in a civil case that largely resembles the criminal charges. Investors subsequently filed several civil lawsuits against Berger and other companies involved in the alleged scam in an attempt to recover losses. In the criminal case, federal prosecutors contend that since 1996, Berger defrauded investors by concealing the fact that he was losing money while pursuing a strategy of short-selling technology and Internet-related stocks. The strategy was based on the assumption that the stocks were overvalued and that a market correction would soon cause a decline in stock prices. For instance, in a March 1998 letter Berger told investors that “economic momentum should deteriorate in 1998″ and that the most vulnerable sectors included “software, Internet, semiconductor equipment, PC manufacturers, brokerages, telecommunications, drug and consumer issue,” the criminal case contends. However the stock prices continued rising, and the hedge fund consistently recorded losses. For example, a confidential offering memorandum dated December 1999 reported that the hedge fund had achieved returns of approximately 27.4% in 1997 and 12.4% in 1998. In fact, according to the charges, the hedge fund’s returns were negative for both years. Berger allegedly concealed the losses by creating false account statements for the fund’s administrator and auditor. At the same time, both of them also received statements from Bear Stearns Securities Corp., which cleared all of the hedge fund’s trades. As of Aug. 31, 1999, Bear Stearns reported that the market value of the fund was $27.9 million. Meanwhile, the fund’s administrator, a Bermuda-based affiliate of Ernst & Young, and the fund’s auditor, a Bermuda-based branch of Deloitte & Touche, believed that the market value of the fund was $426.6 million. Those beliefs were based on phony financial statements prepared by Berger using the stationery of the broker-dealer with which the hedge fund had its account, prosecutors contend. Furthermore, he told the administrator and the auditor to ignore Bear Stearns’ statement because it was incomplete, the criminal charges allege. The scheme was discovered at the end of 1999 when Deloitte & Touche asked for additional information. Berger then fired the accounting giant. An ambitious college dropout who came to the U.S. at age 21, Berger established Manhattan Capital Management Inc., which served as the investment manager for the fund, in 1995. He counted institutional investors such as Republic National Bank of New York and Bank Austria among his clients. The fund was shut down by regulators in January and placed under bankruptcy court protection. Berger faces up to 10 years in prison if convicted of securities fraud and up to five years on the other fraud count. He also faces fines of up to $1.25 million. Copyright �2000 TDD, LLC. All rights reserved.

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