Bernard Madoff

New York Attorney General Andrew M. Cuomo has charged J. Ezra Merkin and the funds he controlled with violating New Yorks Martin Act by concealing from his clients the investment of more than $2.4 billion with Bernard L. Madoff.

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 Madoffs investments. As a result, hundreds of investors lost millions in investments, tragically including important charity organizations that were specifically targeted by Merkin. Attorney General Cuomos lawsuit seeks payment of damages and disgorgement of all fees by Merkin. The complaint also charges Merkins 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 Madoffs 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 historys 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 Merkins 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 Madoffs investments. Indeed, at least two of Merkins most trusted colleagues repeatedly told Merkin that Madoffs 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 Madoffs uncommonly steady returns, there were fundamental questions about Madoffs money management business that suggested fraud. Merkin read, and kept in his files, two press articles questioning Madoffs practices and returns, and several of Merkins 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 Yorks Not-For-Profit Corporation Law 112, 717, and 720 for breaches of fiduciary duty in connection with Merkins service on the boards of certain non-profit organizations. Attorney General Cuomos 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 Ascots assets were held by Madoff;

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

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