S.E.C. v. Berger

• Decision Date: 27 February 2003
• Docket Number: Docket No. 01-6254.
• Citation: 322 F.3d 187
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. Michael W. BERGER, Defendant-Appellant, Manhattan Investment Fund Ltd. and Manhattan Capital Management, Inc., Defendants.
• Court: U.S. Court of Appeals — Second Circuit

322 F.3d 187

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. Michael W. BERGER, Defendant-Appellant, Manhattan Investment Fund Ltd. and Manhattan Capital Management, Inc., Defendants.

Docket No. 01-6254.

United States Court of Appeals, Second Circuit.

Argued: October 25, 2002.

Decided: February 27, 2003.

Darren T. Kaplan (Donald Joseph Cayea, on the brief), Brand, Cayea & Brand LLC, New York, NY, for Defendant-Appellant.

Eric Summergrad, Deputy Solicitor (Giovanni P. Prezioso, General Counsel, and Leslie E. Smith, Senior Litigation Counsel, on the brief), Securities and Exchange Commission, Washington, DC, for Plaintiff-Appellee.

Before: VAN GRAAFEILAND, JACOBS and CABRANES, Circuit Judges.

JOSÉ A. CABRANES, Circuit Judge.

The Securities and Exchange Commission ("SEC") filed this action against Michael W. Berger in the United States District Court for the Southern District of New York, alleging that Berger violated numerous anti-fraud provisions of the federal securities laws. The District Court (Denise Cote, Judge) granted summary judgment in favor of the SEC. On appeal, Berger challenges only the District Court's ruling that it had subject matter jurisdiction over the claims against him. The SEC asserts that Berger, who has fled the United States and is now a fugitive from justice, should be estopped from bringing the instant appeal by the fugitive disentitlement doctrine.

BACKGROUND

We assume familiarity with the District Court's opinion, which sets forth the factual background in detail. SEC v. Berger, 244 F.Supp.3d 180, 183-88 (S.D.N.Y.2001). Accordingly, we need only restate those facts particularly relevant to this appeal.

Defendant Michael W. Berger, along with two close friends as partners, formed an offshore investment company known as the Manhattan Investment Fund, Ltd. ("the Fund"), which was organized under the laws of the British Virgin Islands and commenced trading operations in the Spring of 1996. The Fund was designed for foreign investors and tax-exempt domestic investors; its investment objective was to achieve capital appreciation by investing primarily in publicly-traded securities. Berger is the Fund's only active director.

At the time the complaint was filed, the Fund had approximately 280 investors, only a small percentage having addresses in the United States. Manhattan Capital Management, Inc. ("MCM") served as the investment advisor to the Fund and was paid an annual management fee of 1% of the Fund's net asset value as well as an incentive fee equal to 20% of the Fund's net gains. At all relevant times, Berger was the sole officer of and shareholder in MCM, a Delaware corporation headquartered in New York.

The Fund maintained a brokerage account at Financial Asset Management, Inc. ("FAM"), a broker-dealer located in Columbus, Ohio. FAM cleared all of its transactions through Bear Stearns Securities Corporation ("Bear Stearns"), which is located in New York City. At all relevant times, the majority of the Fund's assets and securities were held in the Bear Stearns account.

Berger invested the Fund's assets in stocks on domestic securities exchanges, employing the risky strategy of "short selling."¹ Using this strategy, the Fund suffered in excess of $300 million in losses between 1996 and 2000. Rather than reporting these losses, Berger, working in New York, created fraudulent account statements that vastly overstated the market value of the Fund's holdings. These statements were forwarded from New York by Berger, acting on behalf of MCM, to Fund Administration Services (the "Fund Administrator") in Bermuda every month for thirty-nine months. Although the Fund Administrator also received accurate account statements directly from Bear Stearns, Berger instructed the Administrator to ignore the Bear Stearns statements, claiming that they did not fully and accurately reflect the Fund's entire portfolio. Accordingly, the Fund Administrator relied upon the fraudulent statements created by Berger in New York to calculate the net asset value of the Fund each month. These overstated calculations were reflected in the Fund's monthly account statements, which the Fund Administrator sent from Bermuda to investors, and in the Fund's annual financial statements, which were created at MCM's offices in New York and made available for potential investors to review. Berger also arranged for these false reports to be sent to the Fund's auditors, Deloitte & Touche, which issued unqualified opinions on the Fund as a result of these false statements.

In telephone calls to the Fund Administrator on January 11 and 12, 2000, Berger revealed that he had made serious mistakes, that his calculations were based on misrepresentations, and that the Fund had suffered substantial losses. On January 14, 2000, Berger sent a letter to all shareholders in the Fund, stating that "the financial statements of the Fund that have been distributed over the last several years have been inaccurate" and that "the Fund's actual net assets are substantially less than those previously reported."

Four days later, on January 18, 2000, the SEC brought this civil action against Berger, MCM, and the Fund, alleging violations of various provisions of the federal securities laws, including section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a); section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5; and section 206(1) and (2) of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-6.

In August 2000, a criminal proceeding was commenced against Berger in the Southern District of New York, and on November 27, 2000, Berger pleaded guilty to securities fraud charges under Section 10-b and Rule 10b-5. During the plea allocution, Berger admitted to the relevant misconduct described above. Specifically, he stated under oath:

[B]etween 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 stocks 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.

Tr. of Plea Allocution, Nov. 27, 2000, at 21. When asked by the District Court whether "some of these acts [were] committed by [him] here in New York or in [the Southern District], or were ... caused to be committed by [him] in this district," Berger replied, "[t]hey were caused to be committed by me in this district, yes." Id. at 22. At the plea hearing, the Assistant United States Attorney stated that, if the case went to trial,

[t]he government would show that Mr. Berger ran a hedge fund called The Manhattan Investment Fund, primarily through an investment company called Manhattan Capital Management, which was located ... in Manhattan.

He started selling shares in the hedge fund in or about April of 1996 and over the years received over $575 million from investors, nearly all of whom were overseas individuals or entities.

After a few months, in 1996, however, Berger began losing large sums of money in the market, primarily by pursuing a strategy of short-selling technology and Internet-related stocks.

In or about September of 1996, Berger began falsifying the hedge fund in information that he provided to the administrator and auditor to conceal the fund's losses. He caused false statements to be sent to the administrator and auditors, and the investors in return received statements from the administrator that falsely represented the value of their shares in the fund.

Id. at 23-24. When Berger was asked by the Court whether he "agree[d] with what the government has said with regard to the evidence that it would produce at a trial against [him]," he replied "[y]es." Id. at 24-25. On September 24, 2001, Berger filed a motion to withdraw his guilty plea, which the District Court (Victor Marrero, Judge) subsequently denied. See United States v. Berger, 188 F.Supp.2d 307, 311 (S.D.N.Y.2002).

Based largely on the facts stipulated to by Berger under oath during his plea allocution, the SEC filed a motion for summary judgment in the instant case on July 20, 2001. In opposing the motion, Berger argued, among other things, that the District Court lacked subject matter jurisdiction over the civil action because it involved extraterritorial conduct that did not directly result from acts occurring within the United States and that did not have an effect on U.S. residents or U.S. markets.

The District Court granted the SEC's motion for summary judgment on November 13, 2001. As an initial matter, the Court determined that it had jurisdiction over the subject matter of the case. Berger, 244 F.Supp.3d at 188-89. The Court reasoned:

Although the Fund operated as a qualified offshore investment fund, and substantial activities for the Fund—including marketing efforts, administration and auditing—were conducted outside of the United States, the fraud was run from the United States and the decisions made in the United States were directly responsible for investor losses. Specifically, the fraud was conceived and executed in New York by Berger, who implemented the scheme through his wholly-owned company, MCM, a Delaware corporation with its principal place of business in New York. The Offer Memo advertises the Fund to "U.S. entities subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA") or other entities exempt from U.S. tax," among others. Berger's investment strategy principally involved the concentrated short selling on American exchanges of securities of...