Investors caught out in the Manhattan Investment Fund scandal could recoup some of their losses if an October hearing rules a proposed settlement can go ahead.

Court documents show that the settlement, if approved, will see a Bermuda affiliate of Ernst & Young - Fund Administration Services (Bermuda) Ltd., the administrators for the British Virgin Island's registered hedge fund - pay out in the region of $40.8 million. The hearing on the proposed settlement is slated to be held on October 4, 2002 in New York.

The net effect of the settlement would be payment to "qualified claimants" on a pro-rata basis, and in keeping with values assigned in bankruptcy proceedings.

Of the $40.8 million, $31.98 million has been earmarked for plaintiffs in legal action taken by Cromer Finance Ltd. and $8.8 million in the so called "Argos action" which includes a numerous plaintiffs including the Bank of Bermuda (Luxembourg).

The scandal - which saw investors lose nearly $500 million - has prompted a complex legal battle with the man behind the scandal, Austrian Michael Berger, pleading guilty of defrauding about 300 persons invested in the fund.

It is understood that Fund Administration Services (Bermuda) Ltd. will no longer be involved in the protracted legal battle currently in front of US District Court Judge Denise Cote, once the settlement is concluded.

In January 2000, Manhattan Investment Fund, which was administered and audited in Bermuda, admitted that it had lost $500 million after previously claiming it had made massive profits.

The scandal was unearthed after Deloitte & Touche LLP, the Bermuda auditors of the fund withdrew approval for the fund's financial statements for 1996, 1997 and 1998.

A subsequent investigation by the Ernst & Young Bermuda affiliate revealed the extent of the losses and accused the fund's managers of misrepresentation.

Shareholders who lost their money in the scheme were suing the fund managers and administrators and Michael Berger, who according to a report by Hedgeworld.com shorted high-tech and dot.com stocks when the value of those stocks skyrocketed. But subsequent losses were hidden from investors in reportedly fabricated financial statements.