N.Y. AG reaches $410M settlement with Madoff middleman

Jessica M. Karmasek Jun. 25, 2012, 12:20pm




NEW YORK (Legal Newsline) - New York Attorney General Eric Schneiderman said Monday his office has secured a $410 million settlement with hedge fund manager J. Ezra Merkin.

Merkin controlled four funds that invested more than $2 billion with Bernard Madoff on behalf of hundreds of investors, including many New York residents and charitable organizations.

Madoff, the former non-executive chairman of the NASDAQ stock market, is the admitted operator of a Ponzi scheme considered to be the largest financial fraud in U.S. history. He is currently serving a 150-year prison sentence in Butner, N.C.

As a result of Madoff's scheme, the investors of the four funds -- Ariel Fund Ltd., Gabriel Capital LP, Ascot Fund Ltd. and Ascot Partners LP -- lost in excess of $1.2 billion.

According to the Attorney General's Office, Merkin turned over to Madoff all of the money in the Ascot funds and a substantial portion of the Ariel and Gabriel funds, but concealed Madoff's role in managing the funds.

In turn, Merkin, who presented himself as a "skilled money manager," received hundreds of millions of dollars in management fees, Schneiderman's office said.

Under the agreement with the Attorney General's Office, Merkin will pay $405 million to compensate investors over a three-year period, and $5 million to the State to cover fees and costs.

This is the first settlement resulting from a government action against Merkin -- and one of the largest agreements of its kind -- Schneiderman's office said.

"This agreement is a victory for justice and accountability," the attorney general said Monday.

"Many New Yorkers entrusted their investments to Mr. Merkin, who then steered the money to Madoff while receiving millions of dollars in management and incentive fees. By holding Mr. Merkin accountable, this settlement will help bring justice for the people and institutions that lost millions of dollars."

In April 2009, the Attorney General's Office charged Merkin with violations of the Martin Act and other state laws for concealing Madoff's control of the Merkin funds and for breaches of his fiduciary duty to manage the funds prudently.

The lawsuit sought damages, disgorgement of all fees by Merkin, and injunctive relief.

Under the agreement with Schneiderman's office, the $410 million paid by Merkin will be used to return money to investors, under the direction of David Pitofsky and Bart Schwartz, court-appointed receivers overseeing the winding-up of the Merkin funds.

"I am satisfied with the settlement that's been achieved, and I am grateful for the New York attorney general's leadership in the effort," Schwartz said in a statement Monday.

"The monies realized from this settlement will help bring the Ariel and Gabriel funds' investors closer to being made whole."

Justice Richard B. Lowe III, of the New York County Supreme Court's Commercial Division, has overseen the attorney general's case since its inception and will have continued oversight of the receivers and implementation of the settlement agreement, Schneiderman added.

Depending on the size of their losses, eligible investors will be entitled to receive over 40 percent of their cash losses.

Pursuant to a claims process, investors who were not aware of Merkin's delegation to Madoff will receive a defined percentage of their losses, while those who were aware of Madoff's role will be eligible to receive a smaller recovery.

Schneiderman's office explained that all investors are also likely to receive additional payments at a future date when the Madoff estate is able to distribute monies recovered by Irving Picard, the Securities Investor Protection Corporation trustee for the liquidation of Madoff's estate, who is not involved in the attorney general's settlement.

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

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