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 today.
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, and Gabriel, and breached the fiduciary duties he owed them. Merkin collected hundreds of millions of dollars in fees for managing investors’ funds, while turning all, or a substantial portion, of those funds over to Madoff and others, whose identity and strategy were not known to, understood by, or approved by the investors, and whom Merkin failed to adequately oversee, audit, or investigate. As a result, investors in Ascot, Gabriel, and Ariel have lost approximately $2.4 billion.”
Cuomo seeks an accounting, restitution and an injunction.