Cuomo Sues Financier Over Madoff Investments
J. Ezra Merkin, a prominent New York financier whose private clients lost more than $2 billion in the collapse of Bernard L. Madoff’s Ponzi scheme, has been accused of fraud and deception in a civil lawsuit filed Monday by the New York attorney general, Andrew M. Cuomo.
The lawsuit, filed under state charity and securities laws, claims that Mr. Merkin improperly collected more than $470 million in fees from his clients, who included more than a dozen nonprofit organizations, by “falsely claiming he actively managed their funds” when in fact he simply handed their money over to Mr. Madoff, without adequate investigation or oversight.
The complaint did not accuse Mr. Merkin of knowing about Mr. Madoff’s vast fraud. But it charged that he had failed to carry out the diligent research and investigation he had promised, and in some cases had deliberately deceived clients about investing with Mr. Madoff.
Mr. Merkin’s “deceit, recklessness, and breaches of fiduciary duty have resulted in the loss of approximately $2.4 billion,” according to the complaint filed by Mr. Cuomo’s office, which opened an investigation of Mr. Merkin soon after the Madoff scheme collapsed in mid-December.
A lawyer for Mr. Merkin, Andrew J. Levander, called the complaint “hasty and ill-conceived,” and said Mr. Merkin would vigorously defend himself.
“The evidence shows that this lawsuit is without merit,” Mr. Levander said, adding that investors had agreed that Mr. Merkin could use other money managers. “Mr. Merkin performed extensive due diligence on Madoff and his trading strategy,” he continued. “Unfortunately, Mr. Merkin’s due diligence, just like the detailed investigations performed by countless others, including regulators, was thwarted by the intricate, fraudulent scheme perpetrated by Madoff.”
By late Monday, Mr. Merkin had agreed to an asset freeze subject to the approval of the courts.
Monday’s accusations echo charges that have already been made against Mr. Merkin in private lawsuits filed by some charities and institutions, which include New York University and a charitable foundation established by Mortimer B. Zuckerman, the publisher and real estate executive.
Mr. Zuckerman also sued Mr. Merkin on Monday, saying he had $40 million in losses. The lawsuit said that Mr. Merkin had failed to exercise reasonable care in selecting money managers and did not conduct “periodic reviews” of the Madoff fund.
The lawsuits are the latest aimed at so-called feeder fund managers. Massachusetts regulators last week sued the Fairfield Greenwich Group, one of the earliest such funds, accusing it of fraud and saying it had repeatedly misled investors about how diligently it checked out Mr. Madoff’s operations.
Exhibits filed with the Cuomo complaint on Monday included transcripts of extensive interviews with Mr. Merkin, in which he was questioned about his relationship with Mr. Madoff, whom he said he had met in “the very late ’80s, maybe 1990.”
Mr. Madoff, who is in jail awaiting sentencing, has pleaded guilty to defrauding clients of more than $65 billion, which they believed they had in their Madoff accounts since the early 1990s, although federal prosecutors say the fraud began at least a decade earlier.
Mr. Merkin’s three investment funds — Ascot Partners, Ariel and Gabriel — had been either fully or partially invested with Mr. Madoff since 1990, according to the complaints. The Ascot fund was formed in 1992 “for the sole, but undisclosed, purpose of serving as a feeder to Madoff,” according to the state complaint.
Despite what Mr. Cuomo’s office portrayed as a minimal role in managing his clients’ assets, Mr. Merkin collected hundreds of millions of dollars in management fees from his clients — fees which dwarfed Mr. Merkin’s personal losses in the Madoff fraud, according to the complaint.
Since Mr. Madoff’s arrest on Dec. 11, Mr. Merkin has avoided public comment. He has left many of the boards on which he has served.
New York University is suing Mr. Merkin over $24 million it lost. According to its lawsuit, its chief investment officer had specifically rejected a suggestion by Mr. Merkin last year that part of the school’s endowment be invested in a Madoff fund — without knowing, or being informed by Mr. Merkin, that he had been investing part of its endowment with Mr. Madoff for eight years.
Other victims who had invested with Mr. Merkin include Yeshiva University, where he was a trustee and led the investment committee, and New York Law School. Yeshiva lost $110 million of the money invested with him. Marc Rich, the financier who was pardoned by President Bill Clinton, lost $10 million to $15 million. And Bard College, where Mr. Merkin sat on a board, estimates losses of $3 million of its $11 million investment.
Through its civil complaint, Mr. Cuomo’s office is seeking restitution and unspecified damages from Mr. Merkin, who has long been a formidable figure in finance and philanthropy.
His father, Hermann Merkin, fled Nazi Germany and made a fortune in the shipping business. The elder Mr. Merkin became a major figure in New York’s Jewish philanthropic elite and was a founder of the Fifth Avenue Synagogue, a center of modern Orthodox Judaism. He contributed millions to help build Yeshiva University and the Merkin Concert Hall near Lincoln Center.
His son expanded his social connections with important links on Wall Street, specifically with Stephen A. Feinberg, head of Cerberus Capital Management, a private investment fund with big stakes in Chrysler and GMAC, the financing arm of General Motors. Mr. Merkin became an investor in Cerberus and put money from Merkin funds into Cerberus and its portfolio companies.
In 2006, Cerberus appointed Mr. Merkin as nonexecutive chairman of GMAC, a position that Mr. Merkin resigned early this year.
This article has been revised to reflect the following correction:
Correction: April 7, 2009
An earlier version of this article misstated one institution that is suing the financier, J. Ezra Merkin. It is New York University, not the NYU School of Law.
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