Cuomo Targets a Madoff Enabler

Andrew Cuomo couldn't get a piece of the Bernard Madoff story, but he's going after the also-radioactive middleman.

This release just went out from his office:

MADOFF MIDDLEMAN EZRA MERKIN CHARGED WITH FRAUD FOR SECRETLY STEERING
$2.4 BILLION IN INVESTOR ASSETS INTO MADOFF’S PONZI SCHEME

Cuomo Alleges that Madoff Associate and his Funds Targeted NY Charities
and Non-Profits, Pocketing Hundreds of Millions of Dollars from his
Investors

NEW YORK, NY (April 6, 2009) – Attorney General Andrew M. Cuomo today
announced charges against J. Ezra Merkin and the funds he controlled for
violating New York’s Martin Act by concealing from his clients the
investment of more than $2.4 billion with Bernard L. Madoff.  In a
54-page complaint filed in New York State Supreme Court, Cuomo alleges
that investors, including several prominent charities and non-profits,
entrusted their investments to Merkin, who then steered the money to
Madoff without their permission, in exchange for $470 million in
management and incentive fees.

The complaint also charges that Merkin ignored irregularities and other
glaring red flags related to Madoff’s investments. As a result,
hundreds of investors lost millions in investments, tragically including
important charity organizations that were specifically targeted by
Merkin. Attorney General Cuomo’s lawsuit seeks payment of damages and
disgorgement of all fees by Merkin. The complaint also charges
Merkin’s management company, Gabriel Capital Corporation
(“GCC”). Merkin managed several funds, including Ascot Fund
Limited, Gabriel Capital L.P., and Ariel Fund.

“Merkin profited enormously from Madoff’s scheme, reaping huge
commissions while investors lost all their money,” said Attorney
General Andrew Cuomo. “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.” The complaint charges that Merkin was not the
“investing guru” he claimed to be but instead just a “master
marketer.”

In a pattern of fraudulent concealment and misrepresentation spanning
nearly two decades, according to the complaint, Merkin held himself out
as a skilled money manager and used his social and charitable
connections to raise over $4 billion from hundreds of individuals,
charities, and other investors.  Merkin turned virtually all of this
money over to third-party money managers, including Madoff.

During individual conversations with investors, and through fraudulent
quarterly reports, investor presentation materials, and offering
documents, Merkin concealed the role Madoff played and misrepresented
the role he played in managing the funds, according to the complaint.
Though acting primarily as a marketer and a middleman, Merkin pocketed
hundreds of millions of dollars in management and incentive fees from
his investors.

Charities and non-profit organizations were particularly susceptible to
and victimized by Merkin’s deceptive tactics.  Over 10 percent of the
assets managed by Merkin belonged to non-profit organizations.  Merkin
collected his customary fees from nonprofits that invested with him, but
typically did not disclose, or actively obscured, that Madoff was
actually managing some or all of the funds they invested.

Merkin kept a total of $2.4 billion of investors’ funds in Madoff –
funds that Merkin had fiduciary obligations to protect – even though
he knew of irregularities and other glaring red-flags related to
Madoff’s investments.  Indeed, at least two of Merkin’s most
trusted colleagues repeatedly told Merkin that Madoff’s returns were
too good to be true— one warning that it could be a Ponzi scheme.
Merkin knew that investment professionals were suspicious of Madoff
because, beyond Madoff’s uncommonly steady returns, there were
fundamental questions about Madoff’s money management business that
suggested fraud.  Merkin read, and kept in his files, two press articles
questioning Madoff’s practices and returns, and several of Merkin’s
own investors told Merkin that due to these questions, they would not
invest with Madoff.

Merkin commingled his personal funds, including his management fees
from Ascot and Gabriel, with the funds of his management company, GCC.
Merkin used GCC funds to make purchases for his personal benefit,
including purchases of over $91 million of artwork for his apartment.

The Complaint charges Merkin with violations of the Martin Act, General
Business Law § 352 et seq., for fraudulent conduct in connection with
the sale of securities, Executive Law § 63(12) for persistent fraud in
the conduct of business, and New York’s Not-For-Profit Corporation Law
§§ 112, 717, and 720 for breaches of fiduciary duty in connection with
Merkin’s service on the boards of certain non-profit organizations.
Attorney General Cuomo’s lawsuit seeks payment of damages and
disgorgement of all fees by Merkin, restitution and other equitable
relief.

Today’s complaint alleges several examples where Merkin repeatedly
lied to investors and prospective investors about how he was investing
their funds:

?       At a presentation to a non-profit organization, Merkin made
statements indicating that only 15 percent of Ascot was invested with
Madoff; in reality the entire fund was   invested in Madoff.
?       Merkin told several investors concerned about rumors that Ascot
was managed by Madoff that only a small or insubstantial portion of
Ascot’s assets were held by Madoff;
?       Merkin outright denied Madoff’s role in Ascot to an investor
who had noticed the similarity between Ascot’s performance and the
performance of another fund generally known to be a Madoff feeder;
?       Merkin told one investor that all of Ascot’s assets were
maintained in a Morgan Stanley brokerage account.