Big Madoff investor charged with civil fraud

/ Source: The Associated Press

New York’s attorney general filed civil fraud charges Monday against a hedge fund manager who funneled $2.4 billion to Wall Street swindler Bernard Madoff without telling clients where their money was going.

The complaint accuses J. Ezra Merkin, the former chairman of GMAC Financial Services, of telling a “panoply of lies” to give the impression that he had a sophisticated investment strategy, when in fact he was simply a middleman who handed most of his cash to Madoff.

A majority of investors had no idea where their money really went until after Madoff’s arrest in December, when Merkin sent a brief note informing them that their money was probably gone forever, the suit said.

“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,” Attorney General Andrew Cuomo said in a statement.

The suit said Merkin, the son of a respected New York philanthropist, charged his clients $470 million in management fees but did little actual work other than “routine bookkeeping.”

Merkin’s attorney, Andrew Levander, called the lawsuit “hasty,” “ill-conceived” and “without merit” and denied that clients were kept in the dark.

“Contrary to the attorney general’s allegation, investors in the Ascot Funds were well aware that the money was being invested with Madoff,” Levander said in a statement. Some of those investors had even met with Madoff personally, he said.

He also insisted that Merkin had taken all appropriate steps to confirm that Madoff’s trading strategy was legitimate.

“Unfortunately,” he wrote, “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.”

Cuomo’s suit, filed in state court in Manhattan, demands that Merkin repay all of the fees he collected from his clients over the years, plus damages.

In addition to accusing Merkin of lying to investors, it said he improperly mixed personal funds with the accounts of his management company, Gabriel Capital Group, and used some of the company’s funds for personal purchases, including $91 million worth of artwork for his apartment.

The suit is the second major action by a state against one of the so-called “feeder funds” that supplied Madoff with billions of investment dollars.

On April 1, Massachusetts Secretary of State William Galvin filed a similar lawsuit against Fairfield Greenwich Group, of Connecticut, saying it had failed to disclose internal concerns about Madoff’s operation. The fund, which had a $7.2 billion account with Madoff, has also professed to be an innocent victim.

Madoff pleaded guilty in March to swindling thousands of investors out of billions of dollars in what could be the largest Ponzi scheme in history.

Many of his victims got involved in the scheme through feeder funds, and Merkin’s Ascot Partners was one of the biggest. It had a $1.7 billion account with Madoff, including deposits from New York University, Tufts University, Bard College and Yeshiva University, where Merkin was a trustee.

Some of those investors and institutions have now sued Merkin, including a new suit filed Monday in New York by Mortimer Zuckerman, the real estate magnate and publisher of the New York Daily News.

Zuckerman said he and his charitable trust collectively lost $40 million in the scheme. He said he was outraged by Merkin’s claim that investors knew Madoff was managing their money.

“This is totally preposterous. I never heard of Bernie Madoff until he sent me that note,” said Zuckerman, referring to Merkin’s December letter advising clients that their money had vanished. “It is a complete fiction. Some people would call it a complete lie.”

He said he hoped Merkin would be stripped of his huge personal fortune, and the money used to distribute among his victimized investors.