J. Ezra Merkin, who steered more than $2 billion of investors’ money into Bernard Madoff Investment Securities – including millions from prominent institutions like Yeshiva University and New York University – was sued Monday for civil fraud.
In a 54-page complaint, New York Attorney General Andrew Cuomo charged the financier, philanthropist and former GMAC chairman with fraudulent concealment and misrepresentation, saying that Merkin steered money to Madoff without his clients’ knowledge or permission.
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The complaint charges that Merkin was not the “investing guru” he claimed to be, but instead a “master marketer,” pocketing hundreds of millions in fees from his investors and failing to disclose his own conflicts of interest. The complaint said he earned an estimated $470 million in fees from his clients for essentially diverting all their funds to Madoff.
“Merkin profited enormously from Madoff’s scheme, reaping huge commissions while investors lost all their money,” Cuomo said.
Merkin began the Ascot fund in 1992 exclusively as “feeder” fund for Madoff, according to the complaint. Ascot grew to hold $1.7 billion from 300 investors by the end of December, 2008 – earning Merkin about $25.5 million a year in fees, the complaint said.
Over 10 percent of the funds came from non-profits, including New York Law School, Bard College, and charitable trusts set up by Holocaust survivor Elie Wiesel and New York Daily News owner Mort Zuckerman. Several of those investors have separately brought suit against Merkin.
Cuomo alleges that in conversations with investors, and in his quarterly reports, Merkin concealed the role Madoff played. In one presentation to a nonprofit investor, for instance, Merkin said that only 15 percent of Ascot was invested with Madoff, the complaint said. In reality, the entire fund was invested with thim.
“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.” Cuomo said.
Merkin sat on several prominent boards, including those of Carnegie Hall, the UJA-Federation, Yeshiva University and the Fifth Avenue Synagogue. Besides being a chairman of GMAC, the auto lender, he was a director of Cerberus, the private equity company.
The complaint contends that Merkin was aware of red-flags related to Madoff going back at least a decade, but persisted in investing with him nonetheless.
In the early 1990s, Victor Teicher, a money manager who had worked for Merkin, told him not to invest with Madoff because his steady returns were impossible, according to the complaint.
Merkin also allegedly knew of the tiny suburban New York accounting firm, Friehling & Horowitz, with one active accountant, that Madoff used – a red flag to many investors.
In his files, Merkin kept two 2001 news articles questioning Madoff’s returns – one published in Barron’s and one by a hedge fund newsletter called MARHedge, according to the complaint.
Merkin’s lawyer, Andrew Levander, released a prepared statement late yesterday, saying he was disappointed that Cuomo had filed what he called a “hasty and ill-conceived civil lawsuit, against which we intend to defend vigorously.”
Cuomo’s complaint is the second to charge a so-called Madoff feeder fund with fraud. Massachusetts regulators last week charged Fairfield Greenwich Group.
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