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U.S. v. BERGER

January 25, 2002

UNITED STATES OF AMERICA,
V.
MICHAEL BERGER, DEFENDANT.



The opinion of the court was delivered by: VICTOR Marrero, United States District Judge.

      DECISION AND ORDER

Defendant Michael Berger (hereinafter "Berger") pled guilty on November 27, 2000 to one count of a two-count information charging securities fraud in violation of § 10(b) of the Securities Exchange Act of 1934, codified at 15 U.S.C. § 78j (b). On September 24, 2001, Berger filed a motion to withdraw his guilty plea, arguing, inter alia, that at the time he entered his guilty plea: (1) he lacked the capacity to voluntarily, knowingly and intelligently plead guilty; (2) the Court failed to conduct a sufficient inquiry into his alleged mental condition and its impact on his competence to plead; (3) he was provided ineffective assistance of counsel; and (4) his plea agreement with the Government contained a material misstatement of the fine range applicable to the charged offense. Oral argument in connection with the motion was heard on January 3, 2002. For the reasons set forth below, Berger's motion is denied.

I. FACTUAL BACKGROUND

A. THE DEFENDANT

Michael Berger was born on November 13, 1971 in London, England and grew up in Salzburg, Austria. (See Forensic Psychological Report of Dr. Sanford L. Drob, dated October 4, 2000 (hereinafter "Drob's Report"), at 7.) From 1990 to 1993, Berger studied macroeconomics at Johannes Kepler University in Linz, Austria. (Id. at 9.) In 1993, he left the university and came to New York to work for Financial Asset Management, Inc. (hereinafter "FAM"), a securities broker-dealer which maintained its headquarters in Columbus, Ohio. (Id.)

In August 1995, Berger, then 24 years old, established an investment company named the Manhattan Investment Fund Limited (hereinafter the "Hedge Fund"). (See United States v. Michael Berger, Information 00 Cr. 877, filed August 23, 2000 (hereinafter the "Information"), ¶ 4.) Berger served as one of three directors of the Hedge Fund. (Id. ¶ 3.) Berger managed the day-to-day operations of the Hedge Fund through Manhattan Capital Management, Inc. (hereinafter "MCM"), an investment company of which Berger was the President, Secretary and one hundred percent shareholder. (See Information ¶ 3 and Presentence Investigation Report, United States v. Michael Berger, Probation Office, United States District Court, Southern District of New York, dated April 18, 2001 (hereinafter the "PSR"), ¶¶ 7-11.) MCM had approximately six employees and maintained its headquarters at 410 Park Avenue, New York, New York. (Information ¶¶ 2, 3.)

B. THE GOVERNMENT'S INVESTIGATION

In April 2000, Berger retained the law firm of Morvillo, Abramowitz, Grand, Iason & Silberberg, P.C. (hereinafter "Morvillo"). Paul Grand, Esq. (hereinafter "Grand"), and Sara Mogulescu, Esq. (hereinafter "Mogulescu"), served as Berger's primary counsel. Allegedly acting upon Grand's advice, Berger continued meeting with representatives from the USAO and the SEC. In spite of Berger's attempts to cooperate, the Government declined to enter into a cooperation agreement with him.

C. THE CIVIL CASE AGAINST BERGER

On January 18, 2000, the SEC commenced a civil enforcement proceeding against Berger, the Hedge Fund, and MCM, alleging violations of various securities laws. See Securities and Exchange Commission v. Berger, No. 00 Civ. 333, 2001 WL 1403028, *1 (S.D.N.Y. Nov. 13, 2001) (Cote, J.) (hereinafter "SEC v. Berger").*fn1 The next day, on January 19, 2000, the Court in that case appointed a receiver (hereinafter "the Receiver") for defendants MCM and the Hedge Fund. Id. According to Berger, the Receiver designated was recommended by Romano and allegedly had a friendly relationship with Romano and later with Grand. In March 2000, the Receiver caused the Fund and MCM to file voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. Id. On April 10, 2000, the United States Bankruptcy Court for the Southern District of New York approved the appointment of the Receiver as Chapter 11 Trustee for MCM and the Hedge Fund. Id.

D. THE GOVERNMENT'S CHARGES AGAINST BERGER

On August 24, 2000, Berger waived indictment and entered a plea of not guilty to the two counts contained in the Information. Count One of the Information charged that from September 1996 through January 2000, Berger, in connection with the purchase and sales of securities, made false representations and material omissions regarding the performance and financial status of the Hedge Fund to its investors, administrator and auditors, in violation of § 10(b), 15 U.S.C. § 78ff, Rule 10b-5, and 18 U.S.C. § 2. Count Two of the Information charged that from September 1996 through January 2000, Berger, acting as an investment adviser, made false representations and material omissions regarding the Hedge Fund's performance and financial status to its investors, administrator and auditor, in violation of 15 U.S.C. § 80b-6 (1), 80b-6(2), and 80b-17, and 18 U.S.C. § 2.

Specifically, the events and Berger's role in them, as set forth in the Information, allege that in August 1995, Berger established the Hedge Fund, incorporating it under the laws of the Territory of the British Virgin Islands. (Information ¶¶ 1, 4.) In April 1996, Berger began selling shares in the Hedge Fund through a confidential offering memorandum. (Id. ¶ 4.) According to the confidential memorandum, the Hedge Fund employed a short to intermediate contrarian investment strategy based on a premise that the stock market, particularly technology and Internet related stocks, was overvalued and that a market correction would soon cause a decline in stock prices. (Id. ¶¶ 4, 5.) However, because the prices of most of the stocks in which Berger invested for the Hedge Fund continually rose, the Hedge Fund consistently suffered losses. (Id. ¶ 5.)

The Hedge Fund maintained a brokerage account at FAM. (Id. ¶ 7.) FAM, in turn, cleared all of the Hedge Fund's trades through FAM's clearing broker, Bear Stearns Securities Corporation (hereinafter "Bear Stearns"). (Id.) The Hedge Fund contracted with Fund Administration Services (Bermuda) Limited (hereinafter the "Administrator"), an affiliate of Ernst and Young, to administer certain aspects of the Hedge Fund, including sending monthly account statements and letters from Berger to the Hedge Fund's investors. (Id. ¶ 9.) Prior to sending the monthly account statements to investors, the Administrator calculated the Hedge Fund's net asset value (hereinafter "NAV") and the market value of each investor's shares in the Hedge Fund. (Id. ¶ 9.)

Starting in September 1999, in order to conceal losses suffered by the Hedge Fund, Berger created false account statements for the Administrator. (Id. ¶ 10.) Although the Administrator received accurate account statements from Bear Stearns, Berger sent fabricated PAM statements with inflated numbers to the Administrator and told the Administrator that because Bear Stearns held only a fraction of the Hedge Fund's portfolio, it should disregard Bear Stearns's statements. (Id. ¶ 12.) Following Berger's instruction, the Administrator used the false FAM account statements to calculate the market value of each investor's shares. (Id.) As a result of these calculations, from September 1996 to December 1999, the Administrator sent the Hedge Fund's investors monthly statements that grossly exaggerated the Hedge Fund's performance and market value. (Id.)

In addition, Berger also concealed the Hedge Fund's losses from its auditors, Deloitte and Touche (Bermuda) (hereinafter "Deloitte"). (Id. ¶ 15.) From May 1997 to March 1999, Berger sent Deloitte fabricated financial information about the Hedge Fund but made it appear as if the information was being sent or faxed directly from PAM. (Id.) Working from the false information that it received from Berger, Deloitte issued unqualified audit reports for the years 1996, 1997, and 1998. (Id. ¶ 16.) During this time, Berger also distributed information, such as confidential offering memoranda, to prospective investors. (Id. ¶ 17.) Some of this information misrepresented the performance of the Hedge Fund, claiming that it had achieved substantial returns, when, in fact, it had incurred significant losses. (Id.) The discrepancies were significant, as illustrated in the following chart cited by the Government:

Year False Asset Number Actual Assets Held Provided by BERGER at Bear Stearns
1996 $17.9 million $5.6 million
1997 $91.5 million $39.3 million
1998 $263.2 million $3.9 million
1999 $515.3 million $27.7 million

(See Government's Memorandum of Law in Opposition to the Defendant Michael Berger's Motion to Withdraw his Plea, dated November 9, 2001 (hereinafter "Govt.'s Memo"), at 5 (citing the PSR ¶ 22). According to the Government, the Hedge Fund's appearance of financial success induced clients to make heavier investments. (Id.) Berger reportedly received over $575 million from at least 300 investors in the Hedge Fund from April 1996 through January 2000. At the same time, the Hedge Fund suffered losses in excess of $400 million. (Id.)

In December 1999, Deloitte informed the Hedge Fund that it was modifying its audit procedures and requested further documentation about the Hedge Fund's finances. (Id. ¶ 18.) As a result, Berger fired Deloitte on January 6, 2000 and Deloitte withdrew the audit opinions that it had issued for 1996, 1997 and 1998. (Id.) On January 12, 2000, the Administrator terminated its agreement with Berger, after determining that he had provided it with false financial information. (Id. ¶ 19.)

E. THE PLEA AGREEMENT

On November 10, 2000, Berger and Grand signed a plea agreement with the Government. (See Letter from Mei Lin Kwan-Gett to Paul Grand, dated November 8, 2000 (hereinafter the "Plea Agreement").) Under its terms, Berger agreed to plead guilty to Count One of the Information. In return, the Government agreed that it would not further prosecute Berger, with the exception of criminal tax violations, for any securities fraud he allegedly committed while working for the Hedge Fund and MCM from September 1996 through January 2000. The Government also agreed to dismiss Count Two of the Information at the time of Berger's sentencing. The Plea Agreement stated that the applicable sentencing range under the United States Sentencing Guidelines (hereinafter the "Guidelines") was 70 to 87 months imprisonment. Berger reserved the right to argue that a downward departure from the Guidelines sentencing range is warranted on the basis that he had a "significantly reduced mental capacity," and the Government reserved the right to oppose such a departure. (Id. at 3.)

The Plea Agreement also stated that, "[i]t is understood that the sentence to be imposed on the defendant is determined solely by the Court." (Id. at 4.) In addition, the parties understood that Berger would "have no right to withdraw his plea of guilty should the sentence by the Court be outside the Guidelines range set forth [in the Plea Agreement]." (Id.) Berger acknowledged that "he has accepted [the] Plea Agreement and decided to plead guilty because he is in fact guilty." (Id. at 5.)

In the Plea Agreement, Berger also waived "any and all right[s] to withdraw his plea or to attack his conviction, either on appeal or collaterally, on the ground that the Government [] failed to produce any discovery material, exculpatory material pursuant to Brady v. Maryland, 373 U.S. 83 (1963), and impeachment material pursuant to Giglio v. United States, 405 U.S. 150 (1972), that ha[d] not already been produced as of the date of the signing of [the] Agreement." (Id.)

F. BERGER'S GUILTY PLEA

1. The Court's Inquiry Into Berger's Competence

At the beginning of the proceeding, the Court asked Berger whether he was then under the care of a doctor or psychiatrist. Berger responded that since March of 2000, he had been receiving "therapy related to family circumstances". (Plea Tr. at 3-4.) When the Court asked whether his treatment had been successful, Berger replied, "I think my doctor would be able to answer better than I am. I cannot tell whether it was successful or not, in particular because it was not an illness of a physical nature." (Id. at 4.) Berger acknowledged that his mind was clear and that he was feeling well.

The Court then asked whether either counsel had any doubts as to Berger's competence to plead. Both the Assistant United States Attorney present (hereinafter the "AUSA") and Grand replied that they did not. The Court asked Berger whether he had had a "full opportunity to discuss [his] case with [his] attorney and to discuss the consequences of entering a plea of guilty to the charge set forth in the Information." (Id. at 6.) Berger replied that he had done so with his current counsel. (Id.)

The Court asked Berger if he was satisfied with his attorney. Berger replied that he was satisfied with the attorney representing him at that time but had not been satisfied with his previous counsel. (Id.) The Court again asked Berger if he was "satisfied with the current counsel with whom" he had "consulted regarding the plea" that he was entering. Id. Berger replied that he was. (Id.) On the basis of Berger's responses to the Court's questions and the Court's observations of Berger's demeanor, the Court concluded that Berger was fully competent to enter an informed plea. (Id.)

2. The Plea Agreement

The Court asked a number of questions to determine whether Berger understood the Plea Agreement that he had entered into with the Government. Berger acknowledged that: (1) he had reviewed the Plea Agreement when he signed it; (2) he had discussed it with his attorney; (3) he fully understood it; and (4) it constituted a "complete and total understanding of the entire agreement" between the Government and him and his attorney. (Plea Tr. at 15.) When the Court asked Berger whether anything might have been left out of the Plea Agreement, Berger replied, "I think it's complete in all material respects." (Id.)

3. Factual Basis for Accepting Berger's Guilty Plea

The Court read Berger the elements of the offense contained in Count One of the Information. (Id. at 10-11.) Berger acknowledged that he understood the allegations in Count One and that the Government would have to prove every element of the charge beyond a reasonable doubt if his case were to go to trial. (Id. at 11.) Berger further acknowledged that he understood that the maximum possible penalty for his alleged offense included, among other things, ten years' imprisonment and a fine of the greatest of three figures: (1) $1 million; (2) twice the gross financial gain that he derived from the offense; or (3) twice the gross financial loss to other persons resulting from his offense. (Id. at 11.)

The Court asked Berger to state in his own words what he did in connection with the crime to which he was entering a plea of guilty. Berger replied as follows:

Your Honor, between 1996 and 2000, I was the sole principal of Manhattan Capital Management, which acted as investment manager for an offshore fund called Manhattan Investment Fund. The fund had a contrarian strategy and was buying and selling short stocks. I believed, starting in late 1996, that the market and in particular technology and Internet-related stocks were grossly overvalued, and at this point, the market turned against me and caused the fund to incur significant losses.
For a variety of reasons, I was unable and not capable to admit the amount of those losses, and caused others to issue misleading statements to investors. I severely regret those actions. I apologize here to all investors, and I wish that what happened never would have happened. And I also would like to add that the words that I'm sorry and I apologize cannot fully embrace the magnitude of what has happened and how bad I feel about the situation. And I think that, you know, this is the actions that I have undertaken and this is what I'm guilty of.

(Id. at 21.)*fn2 The Court asked Berger if the acts he described were committed or caused to be committed in the Southern District of New York. Berger replied, "[t]hey were caused to be committed by me in this district, yes." (Id. at 22.)

The Court also asked Berger whether he knew that his conduct was wrong and illegal at the time he committed these acts. Berger replied, "I realize now that it was, and I closed my eyes in doing what I did. I firmly believed that my strategy would work out, and I felt that the end would justify the means. And I now realize that that was severely wrong." (Id.) To clarify, the Court asked, "At the time you were doing these things, did you believe it was wrong and illegal, when you were causing material information to be sent out that was false?" Berger replied, "I believed that no one else but me would apply the same standards of, you know, of that information, other than me." (Id. at 23.)

Having heard the Court inform him of his rights at trial, of the consequences of pleading guilty, of the maximum sentence that he may face and of the civil rights he may lose, Berger entered a plea of guilty to Count One of the Information. (Id. at 25.) Near the end of the proceeding, the AUSA stated that with respect to Berger's allocution, she sought clarification as to whether Berger had sufficiently admitted that he knew at the time he committed the conduct that it was wrong. (Id. at 27.) As a result, the ...


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