April 6 (Bloomberg) -- New York Attorney General Andrew Cuomo sued financier Ezra Merkin and his Gabriel Capital Corp. for secretly placing $2.4 billion of client funds with Bernard Madoff, who used the money in the largest Ponzi scheme ever.
Merkin steered the assets to Madoff in exchange for $470 million in fees, Cuomo alleged in a complaint filed today in New York state Supreme Court in Manhattan. Madoff, 70, pleaded guilty in federal court last month to defrauding investors of as much as $65 billion. He faces as many as 150 years in prison at his sentencing in June.
Investors including prominent charities entrusted their funds to Merkin, who held himself out to be an “investing guru” when in reality he was “but a master marketer,” Cuomo said in the complaint. Other Merkin entities included the Ariel Fund, Ascot Fund Ltd. and Gabriel, his management company.
“Merkin was just a ‘glorified mailbox,’” Cuomo said in the filing, using the words of an investor who he said learned in December that Madoff, not Merkin, managed Ascot’s assets.
“This lawsuit is without merit,” said Andrew Levander, a lawyer for Merkin, in a statement. “Investors in all of the funds expressly authorized Mr. Merkin to allocate assets to third-party managers such as Madoff, without giving them notice or obtaining their consent.” Levander said Merkin will fight the lawsuit, which seeks payment of damages, disgorgement of all fees, restitution and “other equitable relief.”
All the Assets
Virtually all the assets in Merkin’s Ascot funds, Ascot Partners LP, and Ascot Fund Ltd. were formed in 1992 as feeder funds for Madoff, according to the complaint. Starting in 2000, Merkin also secretly handed Madoff one-third of the assets from Gabriel Capital and Ariel Fund, Cuomo alleged.
About 85 percent of Ascot’s investors did not know until Madoff’s arrest that he had custody of virtually all of Ascot’s assets, the complaint says. Merkin received an annual management fee of 1 percent from Ascot’s investors until 2002, and it increased to 1.5 percent in 2003.
By mid-2008, Merkin had built up his funds to a stated net asset value of over $4.4 billion, Cuomo said. By “recklessly” turning over funds to Madoff, Merkin lost almost all of the $1.7 billion invested in Ascot and about 25 percent of the $2.7 billion invested in Ariel and Gabriel, totaling approximately $2.4 billion in investor harm, according to Cuomo’s complaint.
Nonprofit Boards
New York alleged that Merkin violated New York’s Martin Act by perpetrating a fraud in connection with the sale of securities; the state’s Executive Law for persistent fraud in conducting business; and New York’s not-for-profit corporation law for breaching his fiduciary duty in connection with serving on the boards of nonprofit organizations.
New York University, which had $94 million invested in Ariel, sued Merkin in December, claiming $24 million in Madoff- related losses.
“We are gratified by the attorney general’s action today on behalf of those who have been harmed by Mr. Merkin, and we will cooperate with their investigation,” NYU spokesman John Beckman said.
Other investors who alleged they were hurt by Merkin’s investments with Madoff include Yeshiva University, which lost $110 million, and New York Law School.
Merkin, an honors graduate of Columbia College and Harvard Law School, resigned as a Yeshiva University trustee and as its investment committee chairman in December and left his post as chairman of the investment committee of UJA-Federation of New York, a charity.
Raising Money
After creating Ariel and Gabriel in 1988, Merkin spent most of his time raising money for his funds through his social and professional networks, allowing third parties to manage the investment activity, according to the complaint.
From 1998 to 2000, Merkin was advised by money manager Victor Teicher, who had been jailed in 1994 in an insider trading scandal, Cuomo said. Teicher also served as Merkin’s primary money manager in the 1980s, Cuomo said. In 2000, Teicher was barred by the U.S. Securities and Exchange Commission from working in the securities industry.
Merkin paid Teicher at least $1 million per year in the late 1990s and gave him responsibility for hiring, firing and compensation at Gabriel Capital, Cuomo said. The relationship continued until at least December.
‘Hilarious’ News
“The Madoff news is hilarious; hope you negotiate out of this mess as well as possible,” Teicher wrote in an e-mail to Merkin on Dec. 12, the day after Madoff’s arrest. Cuomo included the e-mail as part of his suit. “I’m yours to help in any way I can; unfortunately, you’ve paid a big price for a lesson on the cost of being greedy.”
The next day, Teicher told Merkin, “I guess you did such a good job in fooling a lot of people that you ultimately fooled yourself,” according to a second e-mail in the lawsuit.
Also today, Mort Zuckerman, chairman of Boston Properties Inc. and the publisher of the New York Daily News, sued Merkin and Gabriel Capital for $40 million in losses on investments made with Bernard L. Madoff Investment Securities LLC.
“Merkin represented that he ‘exercised reasonable care’ in selecting managers and made ‘periodic reviews,’” Zuckerman said in a complaint filed in New York state Supreme Court in Manhattan. “There is no way Merkin could make such a representation without learning basic facts about Madoff’s operation, including the fact that Madoff had not made any stock purchases for at least 13 years.”
Charity Fraud
In January, Cuomo subpoenaed 15 nonprofit entities in an investigation of alleged charity fraud connected to the Madoff scandal, a person familiar with the probe said at the time.
Cuomo, whose office oversees nonprofits in New York, said then that a number of charities were defrauded by the scam and that their losses might exceed $100 million.
Cuomo is the second state regulator to claim those who ran “feeder” funds for Madoff committed fraud. On April 1, Massachusetts securities regulators accused Fairfield Greenwich Group in New York of defrauding investors by misrepresenting its knowledge of how Madoff ran his investment business.
Fairfield’s Sentry Funds had placed about 94 percent of its assets, or $7.2 billion, with Madoff, Massachusetts Secretary of the Commonwealth William Galvin said. Fairfield has denied any wrongdoing.
“It appears Cuomo’s action was spurred by Galvin’s action last week against Fairfield Greenwich,” said Jake Zamansky, a New York attorney who represents a group of investors in Merkin feeder funds. “These regulatory actions are a very welcome sign for investors seeking to recover their losses.”
Morgan Stanley
New York officials alleged today in their lawsuit that Merkin misrepresented the role of Morgan Stanley by referring to the bank as Ascot’s “principal prime broker.” From at least 1999 through 2008, Madoff, not Morgan Stanley, held virtually all securities purportedly acquired by Ascot, Cuomo said.
“By asking investors to wire their funds to the Morgan Stanley account, and describing Morgan Stanley as a prime broker, Merkin further concealed Madoff’s role in Ascot, and misleadingly gave comfort to investors by claiming that some or all of Ascot’s assets were held at a major brokerage firm,” according to the complaint.
Cuomo said Merkin would deceive investors by saying his employees in his Park Avenue offices managed their funds rather than Madoff.
Merkin didn’t entrust much of his own money to Madoff, Cuomo said in the complaint. Though he got management fees of more than $169 million from Ascot between 1995 and 2007, they were paid to him, not reinvested. Merkin invested $7 million in Ascot in its first six years and less than $2 million the following decade, according to the filing.
The case is New York v. Merkin, 450879/2009, New York state Supreme Court (Manhattan.)
By Karen Freifeld
Merkin steered the assets to Madoff in exchange for $470 million in fees, Cuomo alleged in a complaint filed today in New York state Supreme Court in Manhattan. Madoff, 70, pleaded guilty in federal court last month to defrauding investors of as much as $65 billion. He faces as many as 150 years in prison at his sentencing in June.
Investors including prominent charities entrusted their funds to Merkin, who held himself out to be an “investing guru” when in reality he was “but a master marketer,” Cuomo said in the complaint. Other Merkin entities included the Ariel Fund, Ascot Fund Ltd. and Gabriel, his management company.
“Merkin was just a ‘glorified mailbox,’” Cuomo said in the filing, using the words of an investor who he said learned in December that Madoff, not Merkin, managed Ascot’s assets.
“This lawsuit is without merit,” said Andrew Levander, a lawyer for Merkin, in a statement. “Investors in all of the funds expressly authorized Mr. Merkin to allocate assets to third-party managers such as Madoff, without giving them notice or obtaining their consent.” Levander said Merkin will fight the lawsuit, which seeks payment of damages, disgorgement of all fees, restitution and “other equitable relief.”
All the Assets
Virtually all the assets in Merkin’s Ascot funds, Ascot Partners LP, and Ascot Fund Ltd. were formed in 1992 as feeder funds for Madoff, according to the complaint. Starting in 2000, Merkin also secretly handed Madoff one-third of the assets from Gabriel Capital and Ariel Fund, Cuomo alleged.
About 85 percent of Ascot’s investors did not know until Madoff’s arrest that he had custody of virtually all of Ascot’s assets, the complaint says. Merkin received an annual management fee of 1 percent from Ascot’s investors until 2002, and it increased to 1.5 percent in 2003.
By mid-2008, Merkin had built up his funds to a stated net asset value of over $4.4 billion, Cuomo said. By “recklessly” turning over funds to Madoff, Merkin lost almost all of the $1.7 billion invested in Ascot and about 25 percent of the $2.7 billion invested in Ariel and Gabriel, totaling approximately $2.4 billion in investor harm, according to Cuomo’s complaint.
Nonprofit Boards
New York alleged that Merkin violated New York’s Martin Act by perpetrating a fraud in connection with the sale of securities; the state’s Executive Law for persistent fraud in conducting business; and New York’s not-for-profit corporation law for breaching his fiduciary duty in connection with serving on the boards of nonprofit organizations.
New York University, which had $94 million invested in Ariel, sued Merkin in December, claiming $24 million in Madoff- related losses.
“We are gratified by the attorney general’s action today on behalf of those who have been harmed by Mr. Merkin, and we will cooperate with their investigation,” NYU spokesman John Beckman said.
Other investors who alleged they were hurt by Merkin’s investments with Madoff include Yeshiva University, which lost $110 million, and New York Law School.
Merkin, an honors graduate of Columbia College and Harvard Law School, resigned as a Yeshiva University trustee and as its investment committee chairman in December and left his post as chairman of the investment committee of UJA-Federation of New York, a charity.
Raising Money
After creating Ariel and Gabriel in 1988, Merkin spent most of his time raising money for his funds through his social and professional networks, allowing third parties to manage the investment activity, according to the complaint.
From 1998 to 2000, Merkin was advised by money manager Victor Teicher, who had been jailed in 1994 in an insider trading scandal, Cuomo said. Teicher also served as Merkin’s primary money manager in the 1980s, Cuomo said. In 2000, Teicher was barred by the U.S. Securities and Exchange Commission from working in the securities industry.
Merkin paid Teicher at least $1 million per year in the late 1990s and gave him responsibility for hiring, firing and compensation at Gabriel Capital, Cuomo said. The relationship continued until at least December.
‘Hilarious’ News
“The Madoff news is hilarious; hope you negotiate out of this mess as well as possible,” Teicher wrote in an e-mail to Merkin on Dec. 12, the day after Madoff’s arrest. Cuomo included the e-mail as part of his suit. “I’m yours to help in any way I can; unfortunately, you’ve paid a big price for a lesson on the cost of being greedy.”
The next day, Teicher told Merkin, “I guess you did such a good job in fooling a lot of people that you ultimately fooled yourself,” according to a second e-mail in the lawsuit.
Also today, Mort Zuckerman, chairman of Boston Properties Inc. and the publisher of the New York Daily News, sued Merkin and Gabriel Capital for $40 million in losses on investments made with Bernard L. Madoff Investment Securities LLC.
“Merkin represented that he ‘exercised reasonable care’ in selecting managers and made ‘periodic reviews,’” Zuckerman said in a complaint filed in New York state Supreme Court in Manhattan. “There is no way Merkin could make such a representation without learning basic facts about Madoff’s operation, including the fact that Madoff had not made any stock purchases for at least 13 years.”
Charity Fraud
In January, Cuomo subpoenaed 15 nonprofit entities in an investigation of alleged charity fraud connected to the Madoff scandal, a person familiar with the probe said at the time.
Cuomo, whose office oversees nonprofits in New York, said then that a number of charities were defrauded by the scam and that their losses might exceed $100 million.
Cuomo is the second state regulator to claim those who ran “feeder” funds for Madoff committed fraud. On April 1, Massachusetts securities regulators accused Fairfield Greenwich Group in New York of defrauding investors by misrepresenting its knowledge of how Madoff ran his investment business.
Fairfield’s Sentry Funds had placed about 94 percent of its assets, or $7.2 billion, with Madoff, Massachusetts Secretary of the Commonwealth William Galvin said. Fairfield has denied any wrongdoing.
“It appears Cuomo’s action was spurred by Galvin’s action last week against Fairfield Greenwich,” said Jake Zamansky, a New York attorney who represents a group of investors in Merkin feeder funds. “These regulatory actions are a very welcome sign for investors seeking to recover their losses.”
Morgan Stanley
New York officials alleged today in their lawsuit that Merkin misrepresented the role of Morgan Stanley by referring to the bank as Ascot’s “principal prime broker.” From at least 1999 through 2008, Madoff, not Morgan Stanley, held virtually all securities purportedly acquired by Ascot, Cuomo said.
“By asking investors to wire their funds to the Morgan Stanley account, and describing Morgan Stanley as a prime broker, Merkin further concealed Madoff’s role in Ascot, and misleadingly gave comfort to investors by claiming that some or all of Ascot’s assets were held at a major brokerage firm,” according to the complaint.
Cuomo said Merkin would deceive investors by saying his employees in his Park Avenue offices managed their funds rather than Madoff.
Merkin didn’t entrust much of his own money to Madoff, Cuomo said in the complaint. Though he got management fees of more than $169 million from Ascot between 1995 and 2007, they were paid to him, not reinvested. Merkin invested $7 million in Ascot in its first six years and less than $2 million the following decade, according to the filing.
The case is New York v. Merkin, 450879/2009, New York state Supreme Court (Manhattan.)
By Karen Freifeld
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