Bear Stearns - serial NY Bankruptcy Court appearances - fugitive UK citizen in the dock in Vienna - white collar crime - banking Caribbean style
Bear Stearns have an enviable and envied reputation as bankers / advisors / investors but on June 22nd they let it slip that 2 hedge funds specializing in subprime debt run by its asset management arm were facing a sudden wave of withdrawals by investors - followed very soon after on August 4th by Bear Stearns CEO Warren J. Spector resigning on a Sunday afternoon.
Warren, 49, had spent his whole business career with BS and was, after CEO cigar chomping James Cayne ,73, (5.6 million, or 5.6 %) the largest individual shareholder (75,000, or 0.064 %).
As a life master of bridge at age 16 in 1974 he will have plenty of time to spend at tournaments where he is seen as a world class player - maybe he delicious wife Margaret Whitton, who played Molly in the soft porn movie "9 1/2 Weeks," in 1986 can be sent out to earn a crust for the family.
The two funds that got creamed in so-called collateralized debt obligations, or CDOs, backed by home-loan bonds and other "assets" were"Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd., 07-12383 " which raised US $642 million on the launch last last summer. (Ralph Coffi managed the fund and to lose 20% in it's brief 10 mionth life - they had "re-stated losses" in April from 6.5% to 18.97 or 23% for the year). It looks like investors have lost their shirt and attoney's are hovering on behalf of distressed clients.
A sister and less ambitiously titled fund - " Bear Stearns High- Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd., 07-12384," fared better but flunked all the same. However the 4 year old fund which launched with US$916 has been thrown a US$3.2 Bn lifebelt by Bear Stearns. (NYSE : BSC: shares stood at US$145.46 then - Friday 31/7/07 they closed @ US$18.6)
The SEC announced opening a "preliminary enquiry" on June 24th - but don't hold your breath.
The Boston office of the SEC began examining the collapse of Amaranth Advisors , a hedge fund that lost nearly $6 Billion last fall from a series of wrong-way bets on the natural gas market. To date, nothing has come of that inquiry. (Yes. That is right 6 BILLION)
Judge Lifland in the Bloomberg) S. Bankruptcy Court, Southern District of New York (Manhattan) this week refused to grant protection from U.S. lawsuits for Bear Stearns Cos.' two bankrupt hedge funds, finding the Cayman Islands wasn't the proper jurisdiction for them to liquidate assets.``The only adhesive connection with the Cayman Islands that the funds have is the fact that they are registered there,''
``There are no employees or managers in the Cayman Islands, " he added in his written judgement," the investment manager for the funds is located in New York, the administrator that runs the back-office operations of the funds is in the United States along with the funds' books and records, and prior to the commencement of the foreign proceeding, all of the funds' liquid assets were located in the United States.''
Which is by way of a preamble to a fascinating and older appearance for Bear Stearns before Judge Lifland about a re-heated case of white collar crime. Bear Stearns was ordered by Judge Burton Lifland in February, 2007,to repay investors US$125.1 million in an outfit called the Manhattan Investment Fund run by Michael Berger for which Bear Stearns was the fund custodian and as such reported its performance to Ernst & Young, the fund's administrator, and to Deloitte & Touche the independent auditor.
Judge Lifland in U.S. Bankruptcy Court, Southern District of New York (Manhattan) adjudicated that they aided and abetted Berger’s common law fraud and breach of fiduciary duty. He said they had "(failed) to act diligently in a timely manner." Bear Stearns were said in court to have ignored clear signs (and its suspicions) that MIF’s manager was defrauding investors. Allegations were also made that margin requirements were waived or reduced.
The Court considered that Bear Stearns was required to do more than simply ask Berger if he was doing wrong. It had to consult any ‘easily obtainable sources of information that would bear on the truth of any explanation received from the potential wrongdoer’.
Investors had already recouped some of their money in a 2001 class action against Ernst & Young and Deloitte & Touche.
In May 2007, Bear Sterns filed an appeal. They brought a motion to dismiss the investors’ claim on the basis that Bear Stearns’ actions did not substantially assist Berger’s fraud. Th e New York Court granted the motion to dismiss: a clearing broker does not provide substantial assistance to a fraud simply by clearing trades. Failing to enforce margin requirements, continuing to execute trades despite margin violations, or executing trades in order to reduce a loan of money under margin do not constitute substantial assistance, because credit and margin regulations are designed to protect the viability of brokers, not investors.
A recent examination (27th August 2007) of the case concluded that if the proceedings arising from the collapse of MIF against Bear Stearns had been brought under English and not New York law, Bear Stearns may well have been found liable to contribute to MIF’s assets. Two legal reports cover the two appearances of of Bear Stearns about their role as custodian of MIF here and here See also here re british Virgin islands law.
How you may ask did Bear Stearns end up being sued by investors in a fund which they only held custody - well, as ever there hangs a fascinating tale of ambition, youth, greed, optimism and fear of prison.
Michael Wolfgang Berger , (pic) it appears, was born in the UK (and is a UK citizen) and grew up in Salzburg, Austria. The young man (then 21) arrived in New York in 1993 to work for securities broker-dealer Financial Assets Management, based in Columbus, Ohio.
Only 2 years later he set up Manhattan Investment Fund, an open end investment company under the laws of the British Virgin Islands (‘BVI’). Through a wholly owned New York company, Manhattan Capital Management Inc (‘MCM’), Berger served as the investment manager and advisor for MIF . This sold to dozens of offshore investors ,shares valued at $100, with a minimum investment of 250 shares with the intention of investing by shorting the (then !) soaring dot.com stocks which he said were due for a correction.
A brilliant idea but 5 years ahead of the market.
Using his connection through highly respectable FAM he hailed onboard blue chip Wall Street operators, Bear Stearns, Ernst & Young and Deloitte Touche as custodians, administrators and auditors.
In his first few months his assets shrunk to US$5.6 Mn.
He then made the seond mistake, he told his investors they had grown to US$17.9Mn.
Somehow he obtained FAM letterhead and made his third mistake.
He used this kosher stationery to report growing assets which had dwindled by end 1998 to US$3.9MN.
He told investors that funds had grown to US$263.2 Mn.
His assets were $27.7 million by end 1999 bu he reported a doubling since the last year of funds to US $515.3 million.
At this time Deloittes modified their audit - Berger fired them.Mistake number 346 by then as Deloitte withdrew retrospectively their audit assurances for years 1996/1997 and 1998.
In December 1999 the Securities and Exchnage Commission came calling and by November 2000 he was telling a New York District Court who had decided that there was sufficient evidence that Berger was operating a Ponzi scheme ..
"I came here today not only to plead guilty but to express my apologies to all of the shareholders in the fund and to tell you that I am extremely sorry for what I did. My misrepresentations arose out of my conviction that the technology sector was overpriced and my inability to face the fact that my strategy of selling short technology stocks was not working. I was unable to change my course no matter how long the market moved against me or how great the losses were. Throughout, it was my hope that I would ultimately make money for investors."
Berger realised he was facing the district court recommendation of an 87-month sentence and a $424 million fine when he should appear for sentencing on March 1, 2002. He ran. The FBI started looking.
Unmarried, Berger was known to date models drove BMW's and Mercedes-Benz, and loves yachts and the nautical life of luxury lifestyle and once had a place in the Hamptons on Long Island where he loved to spend weekends with his girlfriends.
On July 9th this year, 7 years later he was found driving a red Opel Corsa saloon in Wels, on the motorway between Vienna and Salzburg, Austria and appeared in court in Vienna.
Austrian Banks, BA-APPROX., First bank and the RLB NOe Vienna - made losses in his funds according to the Standard newspaper and will no doubt be keen to see what happens now.
How much of the US$400Mn. lost by investors will be recovered remains to be seen.
Don't hold your breath but as Austria does not have an extradition treaty with US, and the UK has super express extradition to the US on demand (courtesy Tony Blair et.al.) his country of birth , like that of the traitor and radio broadcaster for Nazi Germany Lord Haw Haw (William Joyce) in World War II will no doubt figure highly.
So when you are invited to invest in a fund that is registered in the British Virgin Islands, Cayman islands etc., etc., there is a very, very good reason , even if blue chip names are involved.
Your chances of getting your investment back if things go tits up are remarkably slim.
Which may be why Bear Stearns shares have been heading south so fast in the past few weeks.... and why Michael Wolfgang Berger ended up in Austria.
Meanwhile keep an eye open for Margaret Whitton (see pic) slated as Executive producer of "The Loop" to be produced next year .