MANHATTAN (CN) - Mort Zuckerman sued J. Ezra Merkin for $40 million, saying the financier - who was sued on similar charges Monday by the State of New York - blew Zuckerman's money by throwing it into Bernard Madoff's $65 billion Ponzi scheme. Zuckerman also sued Merkin's auditor, BDO Seidman.
Zuckerman, who owns the New York Daily News and runs US News & World Report, says he personally invested $15 million with Merkin. Zuckerman says his company, co-plaintiff CRT Investments, handed over another $25 million.
Zuckerman says he forked over the money in July 2006. "CRT invested $25 million in Merkin's Ascot Fund Limited ('Ascot Fund'), and Zuckerman personally invested $15 million in Gabriel Capital Partners LLP ('Gabriel Capital'), another fund managed by Merkin," according to the complaint in New York County Court.
The complaint continues: "On Dec. 11, 2008, Bernard Madoff was arrested, having confessed to running a Ponzi scheme for many years. On Dec. 12, 2008, Zuckerman received two facsimiles from Merkin. The first revealed that 'substantially all' of Ascot fund was invested with Madoff and likely was lost. The second revealed that about 30% of Gabriel Capital had been given to Madoff and also was likely gone.
"Zuckerman was stunned. Over the previous three years, Zuckerman and Merkin had forged a close relationship. Merkin became a trusted investment advisor to Zuckerman, and Zuckerman in turn committed to invest in excess of $100 million in various Merkin-sponsored ventures.
"Never once during their meetings and calls did Merkin mention to Zuckerman the name Madoff. Never once did Merkin reveal that 100% of Ascot Fund was invested with Madoff. Moreover, the written offering materials provided by Merkin failed to disclose that the fund acted purely as a feeder into Madoff.
"After learning the truth, Zuckerman confronted Merkin and demanded to know how Merkin could have failed to reveal that he was turning over 100% of the Ascot money to Madoff. Merkin did not deny his failure to reveal the truth but merely responded, 'It may have been connected to something I said several years earlier.' Zuckerman responded, 'That's preposterous.' ...
"Merkin's fraudulent scheme had other enablers. The financial statements of both Ascot Fund and Gabriel Capital were audited by [defendants] BDO Seidman and its sister firm BDO Tortuga. Those audits concluded and represented that the financial statements were clean. In fact, the financial statements were utterly false and misleading, and the auditors failed to warn plaintiffs of Ascot's total devotion to Madoff or to detect and warn plaintiffs of the many signs that Madoff's enterprise was a sham. ... As a result, Zuckerman brings suit against BDO for negligence and aiding and abetting fraud."
Zuckerman is represented in New York County Court by Stephen Susman.
Here is Courthouse News' Monday story on the state's case against Merkin.
MANHATTAN (CN) - Financier J. Ezra Merkin charged clients $470 million to "manage" their money, though he simply turned it over to Bernard Madoff and lost $2.4 billion of it, New York Attorney General Andrew Cuomo said in a lawsuit Monday.
According to the complaint against Merkin and Gabriel Capital Corp. in New York County Court: "J. Ezra Merkin betrayed hundreds of investors who entrusted him with their savings by recklessly feeding their funds into the largest Ponzi scheme in history, while falsely claiming he actively managed their funds. Merkin held himself out to investors as an investing guru, collecting more than $470 million in management and incentive fees from his Ascot, Gabriel and Ariel funds. In reality, Merkin was but a master marketer, his efforts substantially directed only at convincing investors - including many charities - to invest in his funds. Merkin's deceit, recklessness, and breaches of fiduciary duty have resulted in the loss of approximately $2.4 billion.
"Merkin's Ascot funds, Ascot Partners, L.P., and Ascot Fund Limited (together, 'Ascot') were formed in 1992 to be, and always were, 'feeder' funds that entrusted Bernard L. Madoff with virtually all of their assets. Madoff then stole, dissipated or lost those funds in a massive Ponzi scheme. All the while Merkin deceived Ascot investors into believing Merkin, not a third party, was actively managing their investments. In fact, Merkin did little work for Ascot other than routine bookkeeping and engaging in occasional telephone conversations with Madoff. In the words of one investor who, like most, learned only in December 2008 that Madoff, not Merkin, managed Ascot's assets, Merkin was just a 'glorified mailbox.'
"Merkin falsely marketed his funds Gabriel Capital, L.P. ('Gabriel') and Ariel Fund Limited ('Ariel') as vehicles for investing in distressed debt and bankruptcy-related securities. However, beginning in or around 2000, Merkin surreptitiously handed over up to a third of the assets of Gabriel and Ariel to Madoff, even though Madoff's purported strategy had nothing to do with distressed debt or investments in bankruptcies. And Merkin hid this shift of his funds' assets from his funds' investors. Indeed, even when investors told Merkin that they did not want to invest with Madoff, Merkin failed to disclose that the investors were already invested with Madoff through the Ariel or Gabriel fund.
"Charities and non-profit organizations were particularly susceptible to and victimized by Merkin's deceptive tactics. Merkin actively marketed his funds to such organizations, and lured many other investors to invest using his affiliations with those highly respected institutions.
"Merkin collected his customary fees from nonprofits that invested with him, but typically did not disclose, and actively obscured, that Madoff was actually managing some or all of the funds they invested. In one case, he collected the fees even though both he and Madoff sat on the Board of Trustees of the organization. Merkin also engaged in self-dealing once he was entrenched in the leadership of nonprofit organizations, recommending that they place money in ventures in which he had a financial interest without, in some instances, disclosing to the organization his clear conflict of interest.
"Through his misrepresentations, concealment, self-dealing, reckless conduct, and gross negligence, Merkin abused the trust of investors in Ascot, Ariel, an
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