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November 13, 2001


The opinion of the court was delivered by: Cote, District Judge.

Plaintiff Securities and Exchange Commission ("SEC") moves for summary judgment in this securities fraud action as to defendant Michael W. Berger ("Berger"). The SEC having shown through undisputed evidence that Berger caused materially false statements, about the performance of an offshore fund that he controlled from Manhattan, to be created and disseminated to the fund's investors, the motion is granted.


The SEC brought this action on January 18, 2000, against Berger, the Manhattan Investment Fund, Ltd. (the "Fund"), and Manhattan Capital Management, Inc. ("MCM"), alleging violations of the securities laws, including Section 17(a) of the Securities Act of 1933 ("Section 17(a)"), 15 U.S.C. § 77q(a), Section 10(b) of the Securities Exchange Act of 1934 ("Section 10(b)"), 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder ("Rule 10b-5"), 17 C.F.R. § 240.10b-5, and Sections 206(1) and (2) of the Investment Advisers Act of 1940 ("Advisers Act"), 15 U.S.C. § 80b-6. Also on January 18, 2000, this Court issued an order freezing the assets of MCM and the Fund, preliminarily enjoining defendants Berger and MCM from violating certain provisions of the federal securities laws, and temporarily restraining the Fund from violating certain provisions of the federal securities laws. By order dated January 19, 2000, a receiver was appointed for defendants MCM and the Fund.*fn1

Berger filed his answer in this action, asserting a general denial pursuant to the Fifth Amendment to the U.S. Constitution, on May 19, 2000. Pursuant to a series of requests by the parties, discovery in this action was extended from March 2000 to June 18, 2001. Berger's first counsel was replaced on May 30, 2000, by an attorney who was himself relieved on April 5, 2001. Extensions of time were provided to Berger thereafter so that he could procure other representation. Berger's current counsel was retained in July of 2001.

The SEC filed its motion for summary judgment on July 20, 2001. Berger submitted some documentary evidence but did not submit any affidavits in opposition to the motion. In response to arguments made by Berger, the SEC submitted further evidentiary material with its reply. As a result, Berger's request to file a sur-reply was granted. The motion for summary judgment was fully submitted on November 5, 2001.

A. Evidence Apart from Berger's Plea Allocution

The following facts, drawn from the evidence submitted by the parties,*fn2 with the exception of Berger's allocution at the entry of his plea of guilty to securities fraud on November 27, 2000, are undisputed unless otherwise noted.*fn3 Berger was the President, Secretary, and sole shareholder of defendant MCM, and was a director of the Fund. The Fund was a qualified offshore investment company organized under the laws of the British Virgin Islands, designed for foreign investors and United States tax-exempt investors. According to its confidential offering memorandum ("Offer Memo"), the Fund's investment objective was to achieve capital appreciation by investing primarily in highly liquid listed issues. The Fund had over 200 investors of record.

The Fund maintained a brokerage account at Financial Asset Management, Inc. ("FAM"), a broker-dealer located in Columbus, Ohio. FAM cleared all of its transactions through its clearing broker, Bear Stearns Securities Corporation ("Bear Stearns"), in New York City. As the introducing firm, FAM did not hold any of the Fund's securities or other assets. At all relevant times, the majority of the Fund's assets and securities were held in the Bear Stearns account. In addition, the Fund maintained accounts with approximately 12 to 15 other brokerage firms in the United States, approximately half of which are located in Manhattan. All securities transactions through these firms on behalf of the Fund also cleared through Bear Stearns. The Fund traded exclusively in stocks traded on U.S. stock exchanges or quoted on the NASDAQ.

MCM is a Delaware corporation, headquartered in New York City. Pursuant to an Investment Advisory Agreement between MCM and the Fund, MCM served as the investment advisor of the Fund and was paid a management fee at an annual rate of 1% of the Fund's Net Asset Value ("NAV"). Under the agreement, MCM was also paid an incentive fee equal to 20% of the net realized and unrealized appreciation of the NAV per share. MCM received several million dollars pursuant to the Investment Advisory Agreement with the Fund.

Berger owns and controls MCM and is the company's only officer. MCM has no directors, and Berger was solely responsible for overseeing MCM's day-to-day operations in New York and supervising its six employees. While the Fund had three directors, Berger was the only one who was actively involved in the Fund's daily operations. No meetings of the Fund's board of directors were held, and the Fund had no employees. In sum, MCM and the Fund were a one-man show, with Berger making all substantive investment decisions.*fn4

The Fund commenced trading operations in or about Spring 1996, with an investment strategy that primarily involved the concentrated short-selling of securities of certain internet and technology-related U.S. companies. Because the prices of most internet stocks increased dramatically between 1996 and 2000, the Fund consistently suffered losses. Those losses now total nearly $400 million.*fn5

The fraudulent scheme began almost immediately. Rather than accurately reporting the losses that the Fund was experiencing, as reflected in the daily Bear Stearns statements, Berger used the Bear Stearns statements as templates to create fictitious account statements, purportedly generated by FAM. FAM never created any account statements of any sort relating to the Fund. Fictitious FAM statements, as well as MCM facsimile transmittal letters purporting to attach monthly Fund account statements, have been retrieved from MCM's computers. These fictitious FAM statements substantially overstated the market value of the Fund's holdings.

Berger caused a fictitious FAM statement to be forwarded to the Fund administrator in Bermuda every month for 39 consecutive months.*fn6 Although the Fund administrator also received accurate account statements directly from Bear Stearns, Berger instructed the administrator to ignore them because he claimed they were not reflective of the Fund's entire portfolio. Thus, the administrator calculated the Fund's NAV and the market value of each investor's shares in the Fund based on the fabricated FAM statements, and sent monthly account statements based on these calculations to the Fund's investors.

In a telephone call on January 11, 2000, to Derek Stapley, a principal of FASB who oversaw administration of the Fund, Berger stated that he had made serious mistakes and wrong decisions and that the Fund had suffered significant losses. The next day, Berger informed Stapley and other FASB personnel that the Fund had suffered substantial losses and that the calculation of the Fund's NAV was based on misrepresentations. In a letter sent to all shareholders in the Fund on January 14, 2000, Berger stated that "the financial statements of the Fund that have been distributed over the last several years have been inaccurate" and that "the Fund's actual net assets are substantially less than those previously reported."

B. Plea Allocution

A criminal proceeding was commenced against Berger in the Southern District of New York in August of 2000. On November 27, 2000, Berger entered a plea of guilty to securities fraud charges under Section 10(b) and Rule 10b-5. While under oath and represented by experienced counsel, Berger stated that he wished to plead guilty to securities fraud. Berger admitted that he was the sole principal of the Fund, and that because of his belief that technology and internet-related stocks were grossly overvalued, the Fund engaged in "a contrarian strategy" of trading "short stocks." He admitted that the market turned against him and caused the Fund "to incur significant losses." Frankly conceding that he had not been able to acknowledge the enormity of those losses, Berger admitted that, while acting from the Southern District of New York, he caused others to issue false account statements to investors starting in or about September 1996. Finally, Berger admitted that, at the time he caused others to do these acts, he knew it was unlawful.

When asked to summarize the Government's evidence against Berger that would be produced at trial, the Assistant United States Attorney stated:

The government would show that Mr. Berger ran a hedge fund called The Manhattan Investment Fund, primarily through an investment company called Manhattan Capital Management, which was located . . . here in Manhattan. He started selling shares in the hedge fund in or about April of 1996 and over the years received over $575 million from investors. . . . After a few months, in 1996, however, Berger began losing large sums of money in the market, primarily by pursuing a strategy of short-selling technology and Internet-related stocks. In or about September of 1996, Berger began falsifying the hedge fund in information that he provided to the administrator and auditor to conceal the fund's losses. He caused false statements to be sent to the administrator and auditors, and the investors in return received statements from the administrator that falsely represented the value of their shares in the fund.

When asked if he agreed with the above presentation by the Government, Berger responded "Yes." Berger's counsel at the time, Paul Grand, also read the following statement which had been prepared by "[his] office with Mr. Berger" into the record:

Over a period of several years, I was the manager of the Manhattan Investment Fund, an offshore hedge fund. During that time, I caused false statements to be generated for the fund, which had the effect of misrepresenting its performance to investors, including potential investors who invested based on false information.

On September 24, 2001, represented by new counsel, Berger filed a motion to withdraw his guilty plea.


Summary judgment may not be granted unless the submissions of the parties, taken together, "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law."*fn7 Rule 56(c), Fed.R.Civ.P. The substantive law governing the case will identify those issues that are material, and "only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1987). The moving party bears the burden of demonstrating the absence of a material factual question, and in making this determination the Court must view all facts in the light most favorable to the nonmoving party. See Azrielli v. Cohen Law Offices, 21 F.3d 512, 517 (2d Cir. 1994). When the moving party has asserted facts showing that the nonmovant's claims cannot be sustained, the opposing party must "set forth specific facts showing that there is a genuine issue for trial," and cannot rest on the "mere allegations or denials" of his pleadings. Rule 56(e), Fed.R.Civ.P. See also Goenaga v. March of Dimes Birth Defects ...

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