Top Bermuda accounting firms Deloitte & Touche and Ernst & Young have had the finger of blame pointed at them for the first time in connection with the Manhattan Investment Fund Scandal.

The fund collapsed in January and lost $400 million after manager Michael Berger admitted he had cooked the books which were audited by Deloitte and Touche (Bermuda). The figures also went through the fund manager, Ernst & Young affiliate Fund Administration services Bermuda.

The American lawsuit filed by Cromer Finance on behalf of some of the investors that lost money, claims the accounting firms Deloitte & Touche and Ernst & Young are culpable for Manhattan Investment's losses.

It says the accounting firms helped mask huge discrepancies between what the fund was reporting and its actual assets by certifying heavily inflated financial statements, according to the suit.

For example, Deloitte & Touche reported that the fund had a $19 million increase in net assets in 1998, when it actually lost $200 million, the suit claims.

Deloitte & Touche declined to comment on the Manhattan Investment suit. Ernst & Young, while saying that its Bermuda division handled Manhattan Investment's fund administration work, says it was a victim of the wrongdoing at the hedge fund.

"Mr. Berger defrauded the professionals as well as the investors,'' Ernst & Young New York spokesman Les Zuke says.

Leading American stockbroker Bear Stearns also allegedly passed on an insider trading tip which allowed an investor to pull $20 million out of the Manhattan Investment Fund.

The fund collapsed only months after Moore Capital Management pulled its investment last year.

Bear Stearns, who were Manhattan's brokers, have denied they knew anything was wrong with its books.

Manhattan Investment Fund collapsed in January this year after Michael Berger admitted he had made up the figures for the past four years.

Instead of having $500 million he had said he had, he announced he had cooked the books and only really had $15.2 million. This has left the 250 plus investors battling in court for their money.

Part of the success of the fund was that it was backed by reputable names -- it was audited by Deloitte & Touche LLP (Bermuda), the fund administrator was Ernst & Young affiliate Fund Administration Services (Bermuda) and Bear Stearns was the fund's prime broker.

Bear Stearns has denied all along that it knew of any accounting irregularities before the demise of Berger, but if the latest revelations prove to be true, it could leave the company open to millions in litigation.

It was revealed this week on business website TheStreet.com that Moore Capital pulled out of Manhattan Investment Fund last year allegedly because it got an inside tip that the fund was a massive fraud.

This is according to new court documents which name investment bank Bear Stearns as the tipster.

The documents say that Bear advised Moore Capital managing partner Zack Bacon that the fund was a "Ponzi scheme'' -- in which new investors' funds are used to pay earlier investors -- just as Moore was preparing to invest an additional $4 million, according to the filing.

The tip allowed Moore to recoup its full investment and left hundreds of other investors with more than $400 million in losses when Manhattan Investment was shut down by the Securities and Exchange Commission in January and forced into receivership, the court filings state.

And there is more evidence of insider dealings according to the amended complaint filed last month in the lawsuit filed by Cromer Finance.

They say Bear also tipped off European investment manager Arpad (Arki) Busson, known in celebrity circles as the husband of model Elle McPherson. The tip allowed Busson to pull $20 million to $25 million he invested in the fund for clients of his firm, European Investment Managers, Cromer says in the suit.

EIM frequently steers its clients to Bear, and Moore Capital is a Bear client, according to the suit.

But Bear says it did nothing inappropriate.

"We categorically deny any improper activity. We did not know of the fraud,'' said spokeswoman Hannah Burns. "When we began to see signs that there was a problem, without hesitation we reported the matter to the SEC.'' Bacon, at Moore Capital, wouldn't comment on the suit. Moore Capital legal counsel Steve Nelson says the firm doesn't comment on litigation.

Manhattan Investment, which once managed nearly $600 million for investors, is now in bankruptcy proceedings. Its former manager, 29-year-old Austrian-born Michael Berger, was indicted in August by the US Attorney in Manhattan and charged with securities fraud that led to the loss of more than $400 million for the fund's investors between 1996 and 1999.

Berger faces up to ten years in prison and $1.25 million in fines on the charges. He says the loss came from a series of bad investments that he tried to cover up.

But the lawsuit contends with extensive detail that Bear knew how financially unsound the fund was, and made certain its favoured clients got out before the fund imploded.

"Bear Stearns continued to overextend margin credit to the fund, at times in violation of applicable margin rules, in order to forestall the fund's collapse and keep the fund liquid long enough to enable those investors to withdraw their money,'' the suit says.

Bear had regularly extended margin, or loans, to the Manhattan Fund, and often exceeded the amount it was permitted to extend under its own and the New York Stock Exchange's margin rules, the suit contents.

Again, the suit contends, Bear had a self-interest in doing so.

In the case of Bacon, the Moore Capital managing partner, his Moore Long/Short Equities not only was an investor in the Manhattan Fund, but also was a Bear client.

Moore's investment adviser, Tower Capital, also had a business relationship with Bear, according to the suit.

When Bacon sought to remove his firm's investment from Manhattan Investment, Berger refused, saying there was a 30-day notice requirement to make such a withdrawal.

At that point, Bacon's investment adviser threatened, implicitly, to expose Berger's fraud unless the notice requirement were waived, and told Berger, "It's best for you personally and generally, if you would waive the notice requirement for Moore,'' according to the suit.

Moore Capital, run by well-known hedge fund manager Louis Bacon, had $9 billion under management as of May, according to a company statement.