Robert W. Dremluk published in The Bankruptcy Strategist
“Prime Brokers, Take Note: In re. Manhattan Investment Fund Ltd.”

The July 2007 issue of The Bankruptcy Strategist includes Bob Dremluk’s article, “Prime Brokers, Take Note: In re. Manhattan Investment Fund Ltd..” In the article, Bob discusses the possible implications of the recent In re. Manhattan Investment Fund Ltd. decision issued by the Bankruptcy Court for the Southern District of New York, which found that Bear Stearns Securities Corp. had received fraudulent transfers aggregating $141 million in connection with the payment of margin payments due from one of its customers who was engaging in fraudulent conduct. Bob writes that “prime brokers may need to structure accounts to avoid a finding by a court of ‘dominion and control’ over funds in the accounts to avoid liability as ‘initial transferees’.” He warns that absent a reversal of the decision, “the shifting of risk for the conduct of their customers to prime brokers to protect investors when the broker is on inquiry notice of the customer’s fraud imposes a potentially significant liability on prime brokers—a cost that will likely be passed through to investors.…” Bob concludes that unless the Bankruptcy Court’s decision is reversed, In re. Manhattan Investment Fund Ltd. “is likely to impose significant due diligence obligations on prime brokers to identify bad conduct of their customers or suffer substantial liability….”