Ezra Merkin, the former chairman of automaker GM's finance arm, and the founder of the $5 billion Gabriel Capital Group, allegedly defrauded his investors and breached his duties to them by losing $2.4 billion in client money that he funneled to $50 billion Ponzi scheme master Bernie Madoff, despite having told investors he was managing the money himself, according to a civil suit filed against him by New York's Attorney General, Andrew Cuomo.
Merkin's attorney struck back swiftly, calling Cuomo's suit "hasty and ill-conceived."
Merkin was forced to resign as chairman of GMAC as a condition of the $6 billion federal bailout of that company when, almost immediately after Madoff's arrest on Dec. 11, he admitted in letters to his clients that he needed to "unwind" his funds and had been a victim of Madoff.
But according to the state's civil suit – brought under the broad powers Cuomo wields under the Martin Act – Merkin committed fraud in connection with the sale of stocks, fraud in conducting his business and breached his fiduciary duty to his clients. The suit alleges that Merkin lost $2.4 billion of the $5 billion clients invested with him because he placed the money with Madoff while suggesting in at least some cases that the money was under his management and oversight. He violated that act "by concealing from his clients the investment of more than $2.4 billion with Bernard L. Madoff," the 54 page civil suit alleges.
"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," Cuomo's office said in a written statement.
Widely viewed as a financial "Golden Boy," Merkin was the scion of Wall Street magician Hermann Merkin and a graduate of the highly regarded Orthodox Jewish Manhattan prep school, Ramaz, Columbia University and Harvard Law School. Merkin was a prominent member of the Fifth Avenue Synagogue that his father co-founded, and he counted a number of its wealthy and powerful members among his investors.
In the world of finance, Merkin was described as a customer's man and a rainmaker: charming to his well-heeled investor's and able to bring billions under his management. He did not, according to published reports, devote himself to the day-to-day mundane task of buying and selling. But he earned hundreds of millions of dollars in fees for the funds invested with Madoff and those overseen by his own handpicked money managers.
The suit was brought using the broad powers of Martin Act, which was passed in 1921 in an effort to curb so-called "Blue Sky" bogus stock schemes – schemes as likely to be grounded in equities as the blue sky above. The Martin Act has been used by an array of New York prosecutors to bring Wall Street to heel in cases including ones against WorldCom and Tyco executives.
"Merkin profited enormously from Madoff's scheme, reaping huge commissions while investors lost all their money," said 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 suit alleges that Merkin kept his money with Madoff even though he knew of irregularities "and other glaring red-flags."