Defendant Michael W. Berger, along with two close friends as partners, formed an offshore investment company known as the Manhattan Investment Fund, Ltd. (‘‘the Fund’’), which was organized under the laws of the British Virgin Islands and commenced trading operations in the Spring of 1996. The Fund was designed for foreign investors and tax-exempt domestic investors; its investment objective was to achieve capital appreciation by investing primarily in publicly-traded securities. Berger is the Fund’s only active director.

At the time the complaint was filed, the Fund had approximately 280 investors, only a small percentage having addresses in the United States. Manhattan Capital Management, Inc. (‘‘MCM’’) served as the investment advisor to the Fund and was paid an annual management fee of 1% of the Fund’s net asset value as well as an incentive fee equal to 20% of the Fund’s net gains. At all relevant times, Berger was the sole officer of and shareholder in MCM, a Delaware corporation headquartered in New York.

The Fund maintained a brokerage account at Financial Asset Management, Inc. (‘‘FAM’’), a broker-dealer located in Columbus, Ohio. FAM cleared all of its transactions through Bear Stearns Securities Corporation (‘‘Bear Stearns’’), which is located in New York City. At all relevant times, the majority of the Fund’s assets and securities were held in the Bear Stearns account.

Berger invested the Fund’s assets in stocks on domestic securities exchanges, employing the risky strategy of ‘‘short selling.’’ [Court’s footnote: The strategy of short selling ‘‘involves the ‘sale of a security that the seller does not own or has not contracted for at the time of sale, and that the seller must borrow to make delivery.’’’ [Citation.] This strategy is premised upon the belief that the investor will be able to buy the stock in the future for less money than the price at which he or she sold short. Berger chose this investment strategy because he believed that the stock market in general, and particularly technology stocks, were overvalued. Because the stocks he sold short continued to climb in value, however, the Fund suffered substantial losses.] Using this strategy, the Fund suffered in excess of $300 million in losses between 1996 and 2000. Rather than reporting these losses, Berger, working in New York, created fraudulent account statements that vastly overstated the market value of the Fund’s holdings. These statements were forwarded from New York by Berger, acting on behalf of MCM, to Fund Administration Services (the ‘‘Fund Administrator’’) in Bermuda every month for thirty-nine months. Although the Fund Administrator also received accurate account statements directly from Bear Stearns, Berger instructed the Administrator to ignore the Bear Stearns statements, claiming that they did not fully and accurately reflect the Fund’s entire portfolio. Accordingly, the Fund Administrator relied upon the fraudulent statements created by Berger in New York to calculate the net asset value of the Fund each month. These overstated calculations were reflected in the Fund’s monthly account statements, which the Fund Administrator sent from Bermuda to investors, and in the Fund’s annual financial statements, which were created at MCM’s offices in New York and made available for potential investors to review. Berger also arranged for these false reports to be sent to the Fund’s auditors, Deloitte & Touche, which issued unqualified opinions on the Fund as a result of these false statements.

In telephone calls to the Fund Administrator on January 11 and 12, 2000, Berger revealed that he had made serious mistakes, that his calculations were based on misrepresentations, and that the Fund had suffered substantial losses. On January 14, 2000, Berger sent a letter to all shareholders in the Fund, stating that ‘‘the financial statements of the Fund that have been distributed over the last several years have been inaccurate’’ and that ‘‘the Fund’s actual net assets are substantially less than those previously reported.’’

Four days later, on January 18, 2000, the SEC brought this civil action against Berger, MCM, and the Fund, alleging violations of various provisions of the federal securities laws, including section 17(a) of the Securities Act of 1933, [citation]; section 10(b) of the Securities Exchange Act of 1934, [citation], and Rule 10b-5 * * *.

In August 2000, a criminal proceeding was commenced against Berger in the Southern District of New York, and on November 27, 2000, Berger pleaded guilty to securities fraud charges under Section 10-b and Rule 10b-5. During the plea allocution, Berger admitted to the relevant misconduct described above. * * *

When asked by the District Court whether ‘‘some of these acts [were] committed by [him] here in New York or in [the Southern District], or were * * * caused to be committed by [him] in this district,’’ Berger replied, ‘‘they were caused to be committed by me in this district, yes.’’ [Citation.] * * *

* * * On September 24, 2001, Berger filed a motion to withdraw his guilty plea, which the District Court subsequently denied. [Citation.]

Based largely on the facts stipulated to by Berger under oath during his plea allocution, the SEC filed a motion for summary judgment in the instant case on July 20, 2001. In opposing the motion, Berger argued, among other things, that the District Court lacked subject matter jurisdiction over the civil action because it involved extraterritorial conduct that did not directly result from acts occurring within the United States and that did not have an effect on U.S. residents or U.S. markets.

The District Court granted the SEC’s motion for summary judgment on November 13, 2001. As an initial matter, the Court determined that it had jurisdiction over the subject matter of the case. [Citation.] * * *

Based on the conduct described above, the District Court concluded that the complaint ‘‘addresses a fraud conceived and executed in New York,’’ and therefore that it had subject matter jurisdiction to entertain the complaint. [Citation.]

After determining that it had jurisdiction, the Court granted the SEC’s motion for summary judgment, holding that ‘‘either through Berger’s plea allocution or through other documentary and testimonial evidence, the SEC has offered sufficient evidence of Berger’s liability.’’ [Citation.] This timely appeal followed.

Immediately after Berger filed the instant appeal, but prior to his sentencing in the criminal matter, Berger fled the United States. He is still a fugitive from justice. [Citation.]

***

Although Title 15 of the United States Code, which sets forth the various statutes governing securities exchanges, is silent as to the extraterritorial application of these statutes, we have recognized that subject matter jurisdiction may extend to claims involving transnational securities frauds. [Citation.] To provide guidance on this topic, we have stated that, where ‘‘a court is confronted with transactions that on any view are predominantly foreign, it must seek to determine whether Congress would have wished the precious resources of United States courts and law enforcement agencies to be devoted to them rather than [to] leave the problem to foreign countries.’’ [Citation.] In applying this standard, we have consistently looked at two factors: (1) whether the wrongful conduct occurred in the United States, and (2) whether the wrongful conduct had a substantial effect in the United States or upon United States citizens. [Citations.] In evaluating these two factors, we apply what are known respectively as the ‘‘conduct test’’ and the ‘‘effects test.’’

In considering the conduct test, we have held that jurisdiction exists only when ‘‘substantial acts in furtherance of the fraud were committed within the United States,’’ [citation], and that the test is met whenever (1) ‘‘the defendant’s activities in the United States were more than ‘merely preparatory’ to a securities fraud conducted elsewhere’’ and (2) the ‘‘activities or culpable failures to act within the United States ‘directly caused’ the claimed losses.’’ [Citation.]

***

Applying this test, we hold that subject matter jurisdiction clearly exists over Berger’s actions. As an initial matter, Berger’s conduct was more than ‘‘merely preparatory’’: Berger admits that

the following activities which materially related to the fraud took place in the United States: (1) creation of false financial information; (2) transmission of that false financial information overseas; [and] (3) approval of the resulting false financial statements prior [to] the statements being sent to investors.

[Citation.] In the words of [the trial judge], 

Berger prepared the fictitious financial statements in New York. These statements were then sent offshore to the Fund’s administrators, and then calculations based on these statements were retransmitted back into this country and abroad to prospective investors, current shareholders, and their agents.

[Citation.] Clearly, the fraudulent scheme was masterminded and implemented by Berger in the United States. [Citations.]

Even if his actions in the United States were more than ‘‘merely preparatory,’’ Berger maintains that these actions are insufficient to confer jurisdiction on United States courts because the activity directly causing harm to investors occurred in Bermuda. * * *

***

* * * To the contrary, [citation] makes clear that we do not lack subject matter jurisdiction in this case simply because the financial statements that were disseminated to the Fund’s investors were prepared in Bermuda. As we explained in [citation], were we to hold otherwise, the protection afforded by the securities laws could be circumvented simply by preparing such statements outside of the United States.

In sum, while operating entirely from New York, Berger executed a massive fraud upon hundreds of investors involving transactions on United States exchanges. Accordingly, the District Court properly determined that it had subject matter jurisdiction under the conduct test. We have no doubt that the effects of Berger’s actions were felt substantially in the United States, but because jurisdiction clearly exists pursuant to the conduct test, we need not consider whether jurisdiction over the instant action might also be grounded on the effects test. [Citation.]

We hold that the District Court had subject matter jurisdiction over the instant action. Because Berger does not contest the District Court’s determination of liability, we affirm the judgment of the District Court * * *.