Page 62

Michael Berger's Manhattan Funds—2000

The most recent infraction occurred in January 2000 with Michael Berger's Manhattan Capital Management. This was a short-biased fund (i.e., long/short U.S. equity fund specializing in short selling). Berger misrepresented the fund's financial condition to the auditors, Deloitte & Touche. He allegedly manufactured fictitious account statements, overstated performance and assets since September 1996, and misstated assets at $426 million when they were $28 million. Berger told different parties to ignore information, that it didn't represent his entire portfolio. Deloitte & Touche were fired after they withdrew their approval of accountant's statements.

In August 2000, Berger was charged with two criminal counts of securities fraud in connection with the loss of more than $400 million by at least 300 investors. The charges mirror a civil suit filed by the SEC in January. A number of investors have also filed civil lawsuits to recover damages. Berger, who pleaded guilty to securities fraud, will be sentenced in March when he could receive up to 10 years in jail and a fine of up to $1.25 million.

Long-Term Capital Management—1998

Long-Term Capital Management, which had close to $7 billion in assets at the end of 1997 and two Nobel laureates among its advisers, Robert Merton and Myron Scholes, came close to collapse in 1998. Fourteen banks and brokerage firms orchestrated a rescue on September 22 and 23, 1998, in which $3.65 billion was raised. Problems started to surface in May when LTCM suffered a 6.7 percent loss. In June, LTCM had a 10.1 percent loss for the month, bringing the year-to-date loss to 15 percent. The losses continued to hemorrhage, and by August LTCM was down 44 percent for the month, and down 52 percent for the year. In its last five months, there was a 92 percent loss.10

LTCM was primarily a global arbitrage fund. An example of a global arbitrage trade is trading U.S. junk bonds versus U.S. government bonds or high-grade corporate bonds. Five-year junk bonds usually yield 2 percent over five-year Treasuries because of the higher risk. For example, a global arbitrageur would say that if the yield spread goes wider than 2 percent, it would narrow again. Similar examples of trades