Fund Manager Berger Charged as Clients Allegedly Lose at Least $400 Million

Michael W. Berger, a 28-year-old fund manager who raised $575 million from wealthy individuals and institutions, lost most of that money betting against Internet stocks and sought to conceal the blunder from investors, federal prosecutors charged Thursday in a criminal complaint.

Charged with securities fraud and a separate count of fraud under the Investment Advisors Act, Berger faces up to 10 years in prison on the securities fraud charge and five years if convicted of violating the Investment Advisors Act, as well as fines of up to $1.25 million.

He pleaded not guilty Thursday.

Though unregistered with the Securities and Exchange Commission, Berger is accused of raising more than $575 million for his Manhattan Investment Fund, which was also unregistered. An Austrian citizen living in New York, Berger gathered the money from around 300 wealthy investors, including Bank Austria, Nikko Bank of Japan and two other Austrian banks.

According to prosecutors, he lost at least $400 million by repeatedly selling short borrowed shares of technology and Internet-related stocks with the intent of buying them back later at a lower price and profiting from the difference. In essence, Berger was betting that these stocks would plunge.

In Berger's portfolio, however, the short sales amounted to a disastrous bet against a sector whose spectacular success confounded even professional investors with more years experience than Berger's life-span.

As the losses mounted, prosecutors said, Berger created false records of its assets, which he presented to auditors at the accounting firm Deloitte & Touche. The fund, which he began in 1995, held $5.6 million in assets the next year, when Berger offered it to foreign investors. But he gave the accounting firm documents claiming it had $17.9 million in assets, prosecutors charged.

Berger concealed the losses and claimed gains of 27.4% in 1997 and 12.4% in 1998, during which years the Nasdaq produced gains of 22% and 38%, respectively, seemingly stirring the seas beneath technology short sellers.

Still, Berger managed to attract additional investors. By the end of 1999, he told Deloitte that the fund held $515.3 million in assets though the real figure was $27.7 million.

He acknowledged the losses and began cooperating with prosecutors in January, when the SEC filed a civil fraud lawsuit against him. He is free on a $100,000 personal recognizance bond, secured by his house in the Hamptons. Berger was ordered to post $75,000 in cash by Sept. 7, and to surrender his passport.

Berger and his lawyer, Sara Mogulescu, could not be reached for comment.