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Hedge fund

Moore Capital Management

was able to pull its $20 million investment out of

Manhattan Investment Fund

last year -- months before the fund collapsed -- because it got an inside tip that the fund was a massive fraud, new court documents claim. The tipster? Investment bank

Bear Stearns


, according to the documents.

Bear, which was Manhattan Investment's clearing broker at the time, advised Moore Capital managing partner Zack Bacon that the fund was a "Ponzi scheme," just as Moore was preparing to invest an additional $4 million, according to the filing. The tip allowed Moore to recoup its full investment and left hundreds of other investors with more than $400 million in losses when Manhattan Investment was shut down by the

Securities and Exchange Commission

in January and forced into receivership, the court filings state.

And Moore Capital wasn't alone, according to the amended complaint filed last month in a lawsuit filed by

Cromer Finance

, a group of former Manhattan Investment investors who claim they weren't among those who Bear warned to get out.

Bear also tipped off European investment manager Arpad "Arki" Busson, known in celebrity circles as the husband of model

Elle McPherson

. The tip allowed Busson to pull $20 million to $25 million he invested in the fund for clients of his firm,

European Investment Managers

, Cromer says in the suit.

And Bear had a reason to help. EIM frequently steers its clients to Bear, and Moore Capital is a Bear client, according to the suit.

Nothing Improper

Bear says it did nothing inappropriate. "We categorically deny any improper activity. We did not know of the fraud," says spokeswoman Hannah Burns. "When we began to see signs that there was a problem, without hesitation we reported the matter to the SEC."

Bacon, at Moore Capital, wouldn't comment on the suit. Moore Capital legal counsel Steve Nelson says the firm doesn't comment on litigation.

Manhattan Investment, which once managed nearly $600 million for investors, is now in bankruptcy proceedings. Its former manager, 28-year-old Austrian Michael Berger, was

indicted in August by the U.S. attorney in Manhattan and charged with securities fraud that led to the loss of more than $400 million for the fund's investors between 1996 and 1999.

Berger faces up to 10 years in prison and $1.25 million in fines on the charges.

The SEC also charged Berger with securities fraud in an emergency enforcement action that shut down the Manhattan Investment in January. His attorney didn't return a phone call.

Blame the Accountants, Too

In its latest filing in the case, in which class-action status is being sought, Cromer Finance claims the accounting firms

Deloitte & Touche


Ernst & Young

also are culpable for Manhattan Investment's losses. The accounting firms helped mask huge discrepancies between what the fund was reporting and its actual assets by certifying heavily inflated financial statements, according to the suit.

For example, Deloitte & Touche reported that the fund had a $19 million increase in net assets in 1998, when it actually lost $200 million, the suit claims.

Deloitte & Touche declined to comment on the Manhattan Investment suit. Ernst & Young, while saying that its Bermuda division handled Manhattan Investment's fund administration work, says it was a victim of the wrongdoing at the hedge fund. "Mr. Berger defrauded the professionals as well as the investors," Ernst & Young New York spokesman Les Zuke says.

But the lawsuit contends with extensive detail that Bear knew how financially unsound the fund was, and made certain its favored clients got out before the fund imploded.

"Bear Stearns continued to overextend margin credit to the fund, at times in violation of applicable margin rules, in order to forestall the fund's collapse and keep the fund liquid long enough to enable those investors to withdraw their money," the suit says. Bear had regularly extended margin, or loans, to the Manhattan Fund, and often exceeded the amount it was permitted to extend under its own and the

New York Stock Exchange's

margin rules, the suit contents.


Again, the suit contends, Bear had a self-interest in doing so.

In the case of Bacon, the Moore Capital managing partner, his

Moore Long/Short Equities

not only was an investor in the Manhattan Fund, but also was a Bear client. Moore's investment adviser,

Tower Capital

, also had a business relationship with Bear, according to the suit.

When Bacon sought to remove his firm's investment from Manhattan Investment, Berger refused, saying there was a 30-day notice requirement to make such a withdrawal. At that point, Bacon's investment adviser threatened, implicitly, to expose Berger's fraud unless the notice requirement were waived, and told Berger, "It's best for you personally and generally, if you would waive the notice requirement for Moore," according to the suit.

Moore Capital, run by well-known hedge fund manager Louis Bacon, had $9 billion under management as of May, according to a company statement.

Nelson, the firm's counsel, declined to elaborate on the association between Moore Long/Short Equities Ltd. and Moore Capital.

"We're a private company," he said.