With Madoff in Jail, Merkin Is New Target

By Josh Nathan-Kazis

Published September 29, 2010, issue of October 08, 2010.
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Some investors in the hedge funds managed by J. Ezra Merkin that were decimated in Bernard Madoff’s massive investment fraud could get money back in the next few months.

But as the first disbursement is prepared, the legal battle over the scraps of the billions once invested in Merkin’s funds has devolved into a complicated web of overlapping and competing lawsuits. Merkin is a defendant in at least five active lawsuits relating to his management of the investment funds.

“It’s entirely unsurprising,” said Barry Adler, a professor at New York University School of Law. Adler said that while he has no knowledge of the details of this case, in financial scandals such as this, “the incentive of each trustee is to sue everyone else who might have money, because that might make his beneficiaries less victimized than the other guy’s.”

Merkin, a wealthy philanthropist from a prominent New York Modern Orthodox family, was identified in the unraveling of the Madoff scandal two years ago as having operated some of the largest so-called feeder funds fueling Madoff’s mega-Ponzi scheme. One of the funds, called Ascot Partners LP, was invested almost entirely in Madoff’s firm; the other two, called Gabriel Capital, LP, and Ariel Fund LTD., were substantially invested in Madoff.

As a result of a suit brought against Merkin by the Office of the New York State Attorney General in April 2009, two separate receivers were appointed by the court to oversee the Merkin funds, one for Ascot and another for both Gabriel and Ariel.

According to the most recent report filed by David B. Pitofsky, the receiver for the Ascot fund, of the $1.7 billion that was purported to be in the fund before Madoff’s scheme was revealed in December 2008, only $9 million remains — and that has been frozen by the judge in a case brought by Irving Picard, the court-appointed trustee in the Madoff bankruptcy.

Merkin chaired the investment committee of Yeshiva University, which had investments in Ascot with a purported value of $110 million. He was also vice chairman of the Ramaz School, which his children attended and which had investments with a purported value of $6 million in Ascot. Neither of those institutions, nor any others that invested in Ascot, stands to recover any funds in the upcoming disbursements, which will go to investors in Ariel and Gabriel.

The Forward Association, which publishes the Forward, was invested in a fund of funds that had, in turn, invested in Ascot.

Meanwhile, Bart M. Schwartz, the receiver for Ariel and Gabriel, filed his own suit against Merkin on September 16. The new complaint accuses Merkin of collecting $300 million in what it calls “unwarranted” fees as the manager of Ariel and Gabriel. The suit alleges that although Merkin told investors that he would manage the funds himself, he in fact turned over the money to Madoff and to a separate firm called Cerberus Capital Management, L.P.

“Merkin was not an investment guru, but instead, nothing more than a glorified, albeit undisclosed, marketer for Cerberus and Madoff,” the complaint alleges. Although there is no allegation that Merkin knew Madoff’s firm was running a massive Ponzi scheme, the complaint does accuse Merkin of “gross negligence” in his dealings with Madoff.

Merkin has yet to file a response to the charges, and his attorney, Andrew J. Levander, did not respond to a request for comment. But Merkin has denied similar allegations brought in other cases.

While filing this new lawsuit, Schwartz has also set in motion a process to distribute $200 million among investors in Ariel and Gabriel, which still retain a little less than half their purported combined 2008 value of $2.7 billion.

According to an August 3 press statement by Schwartz, the two funds control $1 billion in as yet unliquidated assets beyond the $200 million being disbursed. Another $95 million is being set aside to cover expenses and pending legal claims against the funds.

Picard represents one of those claims. His case against Merkin and his funds includes a demand for the return of assets withdrawn from Ariel and Gabriel’s Madoff accounts. In a heated exchange of memoranda, Picard and James C. McCarroll, Schwartz’s attorney, have battled for months over Picard’s right to Ariel and Gabriel funds. In a filing January 25, McCarroll wrote that Picard “has unilaterally and inexplicably decided that justice with respect to Madoff’s unprecedented fraud is best served by seeking to victimize further some of his largest innocent victims — enormous net losers such as Ariel and Gabriel.”

“Almost everyone who invested through [Madoff] has been victimized, and many have been victimized far more severely than” Ariel and Gabriel, Picard shot back February 24. “If anything, Defendant Funds deserve less sympathy than many other victims,” he wrote, citing the sophisticated nature of the funds’ investors.

“Sadly, in his zeal, the Trustee also seems to have lost the necessary objectivity even to distinguish between the victims and the villains of the Madoff fraud,” McCarroll responded March 17.

In an interview, Picard said that he didn’t object to the upcoming disbursement of Ariel and Gabriel funds to investors, given that Schwartz is setting aside the $95 million reserve fund. “The reserve covers, among other things, what we’re asking for,” Picard said. “We certainly don’t have an objection to him giving out the surplus.”

Claims in the Ariel and Gabriel disbursement were due September 20. Pending court approval, the disbursement will occur before the end of the year.

In an entirely separate proceeding, an individual investor in Ascot, named Noel M. Wiederhorn, won $1.5 million from Merkin in a decision August 19.

And in related Madoff news, Madoff feeder-fund manager Stanley Chais died September 26 after a long illness. The Securities and Exchange Commission, the California Attorney General and others sued Chais over his role in the Madoff case. According to one filing, his phone number was found at the top of a speed dial list in Madoff’s office.

Contact Josh Nathan-Kazis at nathankazis@forward.com. Follow him on Twitter @joshnathankazis.

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