## Facts

- Manhattan Investment Fund Ltd. operated as a hedge fund controlled by Michael Berger, primarily short-selling technology stocks in the late 1990s.
- The strategy produced substantial losses (about $394 million), which Berger concealed by misrepresenting the fund as profitable and using new investor money to pay prior investors.
- Bear, Stearns Securities Corp. served as the fund’s prime broker, maintaining a margin account used to secure and support the fund’s short-selling activity.
- Bear Stearns held the margin account subject to restrictions and rights, including a security interest, the ability to limit withdrawals while short positions remained open, and the ability to apply funds to close out short positions.
- Bear Stearns personnel developed concerns after noticing discrepancies between Berger’s reported profits and Bear Stearns’ information suggesting losses; they investigated, obtained inconsistent information regarding auditors and prime-broker relationships, and eventually reported the fund to regulators.
- Regulators shut down the fund, froze assets, and a receiver was appointed; the fund later filed for bankruptcy, and a Chapter 11 trustee was appointed.
- The trustee brought an adversary proceeding seeking to avoid and recover about $141.4 million transferred into the Bear Stearns margin account during the one-year prepetition period under 11 U.S.C. §§ 548 and 550.
- The bankruptcy court granted summary judgment for the trustee on actual fraudulent intent, initial-transferee status, and lack of good faith; Bear Stearns appealed to the district court.

## Issues

1. Whether deposits into the broker margin account constituted a “transfer of an interest of the debtor in property” that removed assets from creditors’ reach under 11 U.S.C. § 548(a)(1)(A).
2. Whether the fund’s operation as a Ponzi scheme established actual intent to hinder, delay, or defraud creditors for § 548(a)(1)(A) purposes.
3. Whether Bear Stearns was an “initial transferee,” rather than a mere conduit, under 11 U.S.C. § 550(a).
4. Whether Bear Stearns was entitled to the § 548(c) defense as a transferee that took for value and in good faith, or whether good faith presented triable fact disputes.

## Decision

- The district court affirmed that the margin-account deposits were “transfers” that removed assets from creditors’ reach because the deposits became subject to Bear Stearns’ security interest and control rights.
- The district court affirmed that the fund operated as a Ponzi scheme and that transfers made in furtherance of that scheme established actual fraudulent intent under § 548(a)(1)(A).
- The district court affirmed that Bear Stearns exercised sufficient dominion and control over the margin-account funds to qualify as an initial transferee under § 550(a).
- The district court reversed the grant of summary judgment against Bear Stearns on the § 548(c) good-faith defense, holding that material factual disputes required further proceedings.

## Legal Principles

- A deposit into a broker margin account can be a fraudulent “transfer” under § 548(a)(1)(A) when the deposit subjects the funds to conditions that materially limit the debtor’s and creditors’ access, including the broker’s security interest and control over withdrawals and liquidation.
- Operation of a Ponzi scheme supports a presumption of actual fraudulent intent for transfers made in furtherance of the scheme under § 548(a)(1)(A).
- A recipient is an “initial transferee” under § 550(a) when it has dominion and control over the funds, not merely a ministerial role in moving money to another party.
- The § 548(c) defense (“for value and in good faith”) is commonly fact-intensive; where the record allows competing inferences about notice of fraud and the reasonableness of investigation and response, summary judgment is improper.

## Conclusion

The court upheld avoidance and recovery theories based on actual fraud and initial-transferee status for deposits into the broker’s margin account, but required a factual determination on whether the broker nonetheless took the transfers in good faith under § 548(c).


In re Manhattan Inv. Fund Ltd., 397 B.R. 1 (S.D.N.Y. 2007)