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Crooks with Deep Pockets

White-collar criminals have the resources to go into hiding rather than face jail time. But for Michael Berger, the jig may be up

On July 20, Michael Berger is scheduled to appear before a judge in Vienna, Austria, to determine whether he will be kept in prison or freed from jail while a variety of charges against him are sorted out. The judge may very well decide that it is best to keep Berger under lock and key.

In 2000, the onetime hedge fund manager pleaded guilty to securities fraud in New York and then, after the district court recommended an 87-month sentence and a $424 million fine, he fled the country. He was on the run for years, until his capture earlier this month after a manhunt spearheaded by the FBI. "I was beginning to be concerned that he would never be brought to justice," says Scott Berman, a partner at Friedman Kaplan Seiler & Adelman, who pursued a class action against Berger's accountants on behalf of investors.

How Upscale Criminals Elude the Law

Berger's case is one example of how difficult it can be for authorities to track down white-collar fugitives. They have advantages that more typical criminals lack, including ties to foreign countries, advanced degrees, and barrels of money that can help secure safe havens. Berger, now 35, was born in London and grew up in Salzburg, Austria. He managed hundreds of millions of dollars out of Park Avenue offices in New York before authorities charged him with misleading investors about his stockpicking prowess. Even as he reported stellar returns to his backers, Berger was hemorrhaging more than $400 million by betting against Internet stocks in the late 1990s. Using his connections and his persuasiveness, Berger was able to avoid legal authorities for years.

Berger is the second high-profile white-collar criminal to be captured in less than a year. Jacob "Kobi" Alexander, the former chief executive of onetime high-flier Comverse Technology (CMVT), was arrested last fall in Namibia. He fled the U.S. after being charged with backdating stock options at Comverse.

Even now it is unclear whether either white-collar fugitive will ever face justice in the U.S. American law-enforcement officials have requested Berger's extradition, but Austria may not comply. Frank Rabino, a criminal defense lawyer who specializes in international issues, says Berger may not be extradited if the crime to which he pleaded guilty is not punishable in Austria or if he is found to be an Austrian citizen (a point that is currently in dispute). Berger also could be prosecuted by Austrian authorities because several of the investors who lost money in his firm are based in that country.

Alexander has successfully pushed back hearings on whether he should be extradited to the U.S., even as his ties to officials in Namibia have come under scrutiny. Alexander has pledged to invest more than $14 million in Namibia, including money for a scholarship fund and a solar housing project.

"Generally [white collar-criminals] are more sophisticated," says Stephen Frye, a Los Angeles-based defense lawyer whose practice specializes in white-collar crime. "If they know what they've been doing is illegal, then, more commonly than your lower-level person, they will have a means and [will] have planned to live abroad."

Covering Up a Losing Bet

Berger came to New York in 1993 to work for securities broker-dealer Financial Assets Management, based in Columbus, Ohio. Two years later, at the age of 24, he opened Manhattan Investment Fund, selling dozens of offshore investors on the idea that soaring dot-com stocks were due for a correction. (He may have had the right idea, but he was five years too early.) Initial shares were valued at $100, with a minimum investment of 250 shares.

The Internet kept booming in those early days. Berger saw significant losses during his first few months, with assets shrinking to $5.6 million at the end of 1996, even as he told investors that they had grown to $17.9 million, according to prosecutors.

Berger's ties to FAM proved to be valuable. He kept up the relationship with his former company, retaining FAM to act as an introducing broker to help open the door with would-be investors. He also used those ties to mislead investors, according to the prosecution's allegations. Bear Stearns (BSC) was the custodian of Berger's fund and reported his performance to Ernst & Young, the fund's administrator, and to Deloitte & Touche, the independent auditor.

But Berger persuaded Ernst & Young and Deloitte & Touche that Bear Stearns' reports were only part of the story, say prosecutors. He obtained FAM letterhead and used it to report that the fund's assets were growing, even as those tracked by Bear Stearns were on the decline. At the end of 1998, his assets had dwindled to $3.9 million, yet he told investors they had increased to $263.2 million. By the end of 1999, his assets were $27.7 million and he reported that they had nearly doubled, to $515.3 million.

Even has his fortunes faded, Berger remained convinced that high-flying tech stocks like (AMZN), Qualcomm (QCOM), and Yahoo! (YHOO) were headed for a crash. At one point, Berger was short 150% of the fund's capital in one stock, EarthLink (ELNK), according to the suit against him.

Busted by the SEC

In December, 1999, Deloitte told Berger that it was modifying its audit procedures and that it need more documentation to back up its reports about his firm's performance. Berger responded by firing Deloitte. The auditor then withdrew its assurances about the firm's finances for 1996, 1997, and 1998.

Also in December, the Securities & Exchange Commission came calling. The SEC first requested documents from Berger to back up claims about his firm's performance and later launched an investigation into the potential wrongdoing. By November, 2000, Berger pleaded guilty to making false representations and to securities fraud.

"I came here today," he told the New York district court, "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 was not the only one accused of wrongdoing. In one investor lawsuit, Bear Stearns was charged with compounding the problems of Berger's fraud by extending him a line of credit so he could short-sell more Internet stocks and bring on more investors. In February, 2007, the company was ordered to repay investors $125.1 million for failing "to act diligently in a timely manner," according to the decision of Judge Burton Lifland. In May, Bear Sterns filed an appeal, and the case is ongoing. Helen Gredd, partner at Lankler Siffert & Wohl in New York, the Manhattan Investment trustee who sued Bear Stearns on behalf of Berger's investors, declined a request for comment.

One of the more unusual episodes came several months later, when Berger tried to withdraw his guilty plea. He said that he was not mentally competent at the time that he made it, arguing among other things that his "extremely traumatic childhood" made him fearful that his attorney at the time would abandon him unless he pleaded guilty as the attorney had advised. Dr. Joshua Dorsky, Berger's former psychiatrist, said that because of his personality disorders, Berger "was not capable of making a rational decision to plead guilty to the counts alleged in the Information." Ultimately, the court ruled against Berger's withdrawal, but the legal wrangling delayed sentencing for months.

On the Lam

Finally, in 2002, as it became clear that Berger could face more than seven years in prison and huge fines, he ran. The FBI had few leads except his ties to London, New York, Florida, the Dominican Republic, and Austria.

Austrian police told Bloomberg News that information received in recent months caused their team and the FBI to heighten search efforts in the region. Berger was found on July 9 driving a red Opel Corsa sedan. "I'm glad he was [finally arrested]," says attorney Berman, who helped Berger investors recoup a portion of their money in a 2001 class action against Ernst & Young and Deloitte & Touche.

The arrest brings some closure to one of the first and largest hedge fund securities frauds in history. If the continually postponed extradition trial of Comverse's Alexander is any indication, however, it may be a year or more before it's determined which country will try Berger. Investors care little about venue: "They want him to be punished," says Berman, "and to get their money back."

For more stories of white-collar fugitives, see our slide show.

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