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.
Merkin as the 'Golden Boy' of Finance
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."
Cuomo launched his probe and issued his subpoenas in the days immediately after news of Merkin's involvement with Madoff.
"At least two of Merkin's most trusted colleagues repeatedly told Merkin that Madoff's returns were too good to be true," the suit says.
It was one of the first, if not the first, action against a feeder fund. Since then, another aggressive state official, William Galvin, the Secretary of State of Massachusetts, has brought a similar in scope civil suit against the Fairfield Greenwich Group, co-founded by a society bold face name, Walter Noel, and with more than $7 billion in Madoff's hands, the largest of the feeder funds. Fairfield Greenwich, according to depositions by its executives, made hundreds of millions in fees as a result of the money it put in Madoff's hands.
In a statement through a spokesman, Merkin's attorney Andrew Levander said, "We are disappointed that the Attorney General of the State of New York has filed this hasty and ill-conceived civil lawsuit, against which we intend to defend vigorously. From the outset of the Attorney General's investigation, Mr. Merkin, Gabriel Capital Corporation, and the funds they manage have provided their full cooperation, answering all questions and producing hundreds of thousands of documents. The evidence shows that this lawsuit is without merit. Contrary to the Attorney General's allegation, investors in the Ascot Funds were well aware that the money was being invested with Madoff. Furthermore, 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. Mr. Merkin performed extensive due diligence on Madoff and his trading strategy, and in addition arranged meetings with Madoff for many investors to perform their own due diligence. 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."
Lawsuits Against Ezra Merkin
Mortimer Zuckerman, the publisher of the New York Daily News, and a billionaire real estate magnate, suffered losses to his charity of $30 million. Nobel Laureate and holocaust survivor Eli Weisel's Foundation for Humanity also suffered losses through money placed with Madoff through Merkin. And Ira Rennert, the chairman of Merkin's synagogue, is also alleged to have suffered staggering losses through investments with Madoff through Merkin.
"I can say that the Attorney General's law suit is fully justified by the experience I had with Ezra Merkin as described in my lawsuit that incidentally was filed the same day," Zuckerman told ABC News.
Zuckerman filed his own lawsuit today seeking to recoup $40 million in losses as a result of Merkin placing funds from Zuckerman's charitable trust and another fund with Madoff.
According to Zuckerman's suit, which also filed in State Supreme Court in Manhattan, Merkin represented that he "exercised reasonable care" in selecting managers and made "periodic reviews." "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," the complaint stated.
Merkin's attorney Andrew Levander said Zuckerman's suit "is entirely baseless and without merit." He continued: "Mr. Zuckerman claims that he believed and that the Offering Memorandum provided that Ascot Partners would be invested in a diversified range of investments. In fact, the Offering Memorandum specifically warned Mr. Zuckerman against the "Lack of Diversification" and that "The Partnership's investment plan does not constitute a balanced investment plan.""
Over the years Merkin had extensive involvement in more than 30 charities and educational institution. He sat on the boards of nonprofits like Carnegie Hall, the United Jewish Appeal, Yeshiva University, which is alleged to have lost $110 million, and the Fifth Avenue Synagogue. At New York University, where he sat on the finance committee, he placed millions with Madoff. He also placed with Madoff money from Tufts University. NYU is suing Merkin and his $1.8 billion Ariel hedge fund over $24 million of the school's funds the billionaire investor allegedly lost with Madoff .
"NYU's own ongoing legal action against Mr. Merkin limits what we can say," said NYU spokesman John Beckman. "However, 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."
Beckman said NYU could not expand on the issues stated in NYU's suit which was begun in December shortly after Madoff was arrested on December 11th, and Merkin on the same day began disclosing the losses his three funds had suffered by placing money with Madoff. Merkin' Ascot Fund placed all of its money under management with Madoff, losing the entire $1.8 billion. His other two funds, Gabriel and Ariel had invested about a third of their assets with Madoff, according to published reports.
Madoff is currently in federal prison in Manhattan awaiting sentencing after pleading guilty to running his $50 billion Ponzi scheme.