In one of the largest agreements of its kind, said this moring that the state has secured a $410 million settlement with J. Ezra Merkin, who controlled four funds that invested over $2 billion with Bernard M. Madoff on behalf of hundreds of investors, including many New Yorkers and charitable organizations.
As a result of Madoff’s Ponzi scheme, the investors in the funds, Ariel Fund Ltd., Gabriel Capital L.P., Ascot Fund Ltd. and Ascot Partners L.P., whose assets were largely handled by Madoff, lost more than $1.2 billion, while Merkin received hundreds of millions of dollars in management fees.
Depending on the size of their losses, eligible investors will be entitled to receive over 40 percent of their cash losses.
“I am proud to announce that we have recovered over $400 million for the investors and charities that were harmed by history’s largest Ponzi scheme. This agreement is a victory for justice and accountability,” said Schneiderman. “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.”
Under the agreement, Merkin will pay $405 million to compensate investors over a three-year period, and $5 million to the State of New York to cover fees and costs. This is the first settlement resulting from a government action against Merkin.
In April 2009, the Office of Attorney General charged Merkin with violations of the Martin Act, General Business Law § 352; and Executive Law § 63(12) 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 this agreement, Merkin will pay $410 million, which 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. Justice Richard B. Lowe III, who has overseen the Attorney General’s case since its inception, will have continued oversight of the receivers and the implementation of the settlement agreement.
Depending on the losses, investors will be entitled to receive more than 40 percent of their cash losses. In a claims process, investors who were not aware of Merkin’s delegation to Madoff will receive a set percentage of their losses, while those who were aware of Madoff’s role will be eligible to receive a smaller recovery.
In addition, all investors are likely to receive additional payments at a future date when the Madoff Estate is able to distribute moneys recovered by Irving Picard, the Securities Investor Protection Corporation Trustee for the liquidation of Madoff’s Estate, who is not involved in today's settlement.
For nearly two decades, Merkin billed himself as a skilled money manager and used his social and charitable connections to raise more than $4 billion from hundreds of individuals, charities, and other investors. Merkin turned over to Madoff all of the money in the Ascot Funds, and a substantial portion of the Ariel and Gabriel Funds.
Schneiderman said that in misleading offering documents and quarterly reports, Merkin concealed Madoff’s role and misrepresented the role he was playing in managing the funds. Acting primarily as a marketer and middleman, Merkin obtained hundreds of millions of dollars in management and incentive fees from his investors.
More than 10 percent of the assets obtained by Merkin belonged to charities and non-profit organizations. Merkin collected 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.
This case was handled by Senior Trial Counsel David N. Ellenhorn, Assistant Attorneys General Daniel Sangeap, Shmuel Kadosh, Veronica Montenegro, and Harriet B. Rosen, under the supervision of Karla G. Sanchez, Executive Deputy Attorney General for Economic Justice.