The Bermuda affiliate of Ernst & Young that was involved in the Manhattan Investment Fund scandal - which saw investors lose nearly $500 million - has reached a settlement "in principle" with shareholders suing them and others in the complex case.

According to a report on Bloomberg, Ernst & Young's Fund Administration (Bermuda) Inc, who locally administered the British Virgin Island's hedge fund, will no longer be involved in the protracted legal battle currently in front of US District Court Judge Denise Cote.

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 Ernst & Young affiliate Fund Administration (Bermuda) Inc 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, the man behind the scandal.

Berger is expected to return to criminal court this month to learn whether he is allowed to change his plea to not guilty and arrange a schedule for the class-action lawsuit.

On Friday, Mr. Cote, the US District Court judge overseeing the complex civil case brought against Berger by a group of investors, announced that the Bermuda affiliate of Ernst & Young had "reached a settlement in principle" with the plaintiffs.

In a statement, the law firm representing Ernst & Young Bermuda said: "Among other things, Berger admitted falsifying the account statements he provided to our client, which was instructed to use them to compute fund net asset values. The client used them, believing them to be genuine."

The terms of the settlement between the shareholders and Fund Administration remain confidential.

The dismissal of the fund's administrator leaves Deloitte & Touche Bermuda, the auditor; Financial Asset Management, a broker-dealer that did trades for the fund, and Berger himself as defendants.

Mr. Cote earlier dismissed prime broker Bears Stearns Securities from the civil case, though the firm is facing a $1.9 billion suit from the fund's trustee in federal bankruptcy court.

An investigation by the Securities and Exchange Commission, after the Deloitte and Touche and Fund Administrator's investigation and led to the collapse of Berger's offshore fund, which attempted to sell short a portfolio of technology stocks the Austrian native believed were overvalued.

Berger, who bet the wrong way on Internet and technology stocks at the time, had pleaded guilty to securities fraud charges in the United States in November 2000 and could face up to ten years in prison.

The manager, now 30, claimed he lost the money because the markets turned against him but said in court last year that he could not face telling investors he had lost their money.

Prosecutors estimate the total losses in the fund at $430 million between 1996 and 1999.

Prosecutors said the fraud he was involved in included the issuance of false statements to his investors.

He is believed to have forged papers by re-programming his fax machine to dupe the administrators, auditors and shareholders.