J. Erzra Merkin, a major "feeder fund" to Bernie Madoff's $65 billion Ponzi scam, was charged today with fraud and deception by New York State Attorney General Andrew M. Cuomo.
The civil lawsuit filed in New York's Supreme Court 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." (Read a brief history of Ponzi schemes.)
Merkin, who pocketed more than $470 million in fees from investors, the suit alleges, was not the "investing guru" he claimed to be, but instead a "master marketer" who knew and ignored the many "glaring red-flags" related to Madoff's investments, according to Cuomo.
Merkin operated several funds, including Ascot Fund, Gabriel Capital Corp. and Ariel Fund, totaling $2.4 billion, that fed into Bernard L. Madoff Securities LLC, the so-called investment firm run by Madoff. In total, Merkin is charged with 720 breaches of fiduciary duty in raising, through social and charitable connections, over $4 billion, which he turned over to third-party money managers, like Madoff.
"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," said Merkin's lawyer, Andrew Levander, in response to the charges. "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."
Madoff, in jail since March 12, awaits sentencing for his masterminding of the decades-long crime, a billion-dollar Ponzi empire built at least half on the backs of feeder funds like Merkin's and one charged last week, Fairfield Greenwich Group, with a civil complaint by William F. Galvin, Massachusetts Secretary of State.
Fairfield, Madoff's largest "feeder," with some $7 billion invested, was run by socialite Walter Noel. Through this entanglement of feeder funds, international hedge funds, sub-partnerships, and pension funds, with thousand of unsuspecting investors, Madoff was able to keep his house of cards standing much longer than he otherwise could have with his band of family members, small-time accountants, and clerks furiously cranking out false statements.
In the Massachusetts' suit, Galvin alleges Fairfield had "complete disregard of its fiduciary duties to its investors" and made "flagrant and recurring misrepresentations to its investors to the level of fraud." A Fairfield spokesperson said the complaint was false and misleading.
Similarly, New York Attorney General Cuomo's complaint against Merkin alleges he repeatedly lied to investors and prospective investors about how funds were invested.
In some cases, Cuomo says, Merkin told investors only 15% of Ascot investments were placed with Madoff. In reality, the entire fund was invested with the Ponzi scheme, the suit alleges. In another example, the suit says Merkin told investors all of Ascot's assets were maintained in a Morgan Stanley brokerage account, and not with Madoff. In addition, Cuomo charges, Merkin "commingled his personal funds" with his investment funds for his personal benefit, including the purchase of over $91 million in artwork for his New York apartment.
The complaint charges Merkin with violations of New York's Martin Act, for fraudulent conduct in connection with the sale of securities, and New York's Not-For-Profit Corporation Law. In the suit, Cuomo is seeking payment of damages and disgorgement of all fees by Merkin, restitution, and other equitable relief.
Robert Chew is a former investor with Madoff via a feeder fund. He lives in Colorado.