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Alleged Madoff Middleman Charged with Fraud

Charities, non-profits lost billions invested with J. Ezra Merkin

April 7, 2009

In a 54-page complaint filed in New York State Supreme Court, Cuomo alleges that investors, including several prominent charities and non-profits, entrusted their investments to Merkin, who then steered the money to Madoff without their permission, in exchange for $470 million in management and incentive fees.

The complaint also charges that Merkin ignored irregularities and other glaring red flags related to Madoff’s investments. As a result, hundreds of investors lost millions in investments, tragically including important charity organizations that were specifically targeted by Merkin. Attorney General Cuomo’s lawsuit seeks payment of damages and disgorgement of all fees by Merkin. The complaint also charges Merkin’s management company, Gabriel Capital Corporation (“GCC”). Merkin managed several funds, including Ascot Fund Limited, Gabriel Capital L.P., and Ariel Fund.

“Merkin profited enormously from Madoff’s scheme, reaping huge commissions while investors lost all their money,” said Attorney General Andrew Cuomo. “Merkin duped individual investors, non-profits, and charities into believing he was responsibly managing their investments, when in actuality he was dumping them into history’s largest Ponzi scheme.” The complaint charges that Merkin was not the “investing guru” he claimed to be but instead just a “master marketer.”

In a pattern of fraudulent concealment and misrepresentation spanning nearly two decades, according to the complaint, Merkin held himself out as a skilled money manager and used his social and charitable connections to raise over $4 billion from hundreds of individuals, charities, and other investors. Merkin turned virtually all of this money over to third-party money managers, including Madoff.

During individual conversations with investors, and through fraudulent quarterly reports, investor presentation materials, and offering documents, Merkin concealed the role Madoff played and misrepresented the role he played in managing the funds, according to the complaint. Though acting primarily as a marketer and a middleman, Merkin pocketed hundreds of millions of dollars in management and incentive fees from his investors.

Charities and non-profit organizations were particularly susceptible to and victimized by Merkin’s deceptive tactics. Over 10 percent of the assets managed by Merkin belonged to non-profit organizations. Merkin collected his customary fees from nonprofits that invested with him, but typically did not disclose, or actively obscured, that Madoff was actually managing some or all of the funds they invested.

Red flags

The complaint alleges that Merkin kept a total of $2.4 billion of investors’ funds in Madoff – funds that Merkin had fiduciary obligations to protect – even though he knew of irregularities and other glaring red-flags related to Madoff’s investments. Indeed, at least two of Merkin’s most trusted colleagues repeatedly told Merkin that Madoff’s returns were too good to be true — one warning that it could be a Ponzi scheme.

Merkin knew that investment professionals were suspicious of Madoff because, beyond Madoff’s uncommonly steady returns, there were fundamental questions about Madoff’s money management business that suggested fraud. Merkin read, and kept in his files, two press articles questioning Madoff’s practices and returns, and several of Merkin’s own investors told Merkin that due to these questions, they would not invest with Madoff.

Merkin commingled his personal funds, including his management fees from Ascot and Gabriel, with the funds of his management company, GCC. Merkin used GCC funds to make purchases for his personal benefit, including purchases of over $91 million of artwork for his apartment.

The complaint charges Merkin with violations of the Martin Act, General Business Law § 352 et seq., for fraudulent conduct in connection with the sale of securities, Executive Law § 63(12) for persistent fraud in the conduct of business, and New York’s Not-For-Profit Corporation Law §§ 112, 717, and 720 for breaches of fiduciary duty in connection with Merkin’s service on the boards of certain non-profit organizations. Attorney General Cuomo’s lawsuit seeks payment of damages and disgorgement of all fees by Merkin, restitution and other equitable relief.

The complaint alleges several examples where Merkin repeatedly lied to investors and prospective investors about how he was investing their funds:

• At a presentation to a non-profit organization, Merkin made statements indicating that only 15 percent of Ascot was invested with Madoff; in reality the entire fund was invested in Madoff.

• Merkin told several investors concerned about rumors that Ascot was managed by Madoff that only a small or insubstantial portion of Ascot’s assets were held by Madoff;

• Merkin outright denied Madoff’s role in Ascot to an investor who had noticed the similarity between Ascot’s performance and the performance of another fund generally known to be a Madoff feeder;

• Merkin told one investor that all of Ascot’s assets were maintained in a Morgan Stanley brokerage account.

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