Madoff Associate Who Ran Feeder Fund Is Charged With Fraud

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The high-profile proprietor of a second feeder fund has been charged in connection with Bernie Madoff’s multi-billion dollar Ponzi scheme.

A civil fraud lawsuit filed by New York Attorney General Andrew Cuomo charges Ezra Merkin, the former chairman of GMAC, and a prominent Madoff associate and New York philanthropist, with “betraying hundreds of investors” by placing billions with Madoff without their knowledge, reports the Wall Street Journal.The suit does not allege that Merkin knew that Madoff was running a Ponzi sheme. But it claims that Merkin lied to investors about the amount he was placing with Madoff, and failed to disclose conflicts of interest.

As we noted last week, Massachusetts Secretary of State William Galvin has filed charges against another Madoff feeder fund, Fairfield Greenwich.

The Journal reports:

Investors in Mr. Merkin’s funds, including Yeshiva University, New York University, New York Law School, Bard College, and Boston Properties chairman and New York Daily News owner Mort Zuckerman’s charitable trust, lost tens of millions in the Madoff Ponzi scheme through their investments with Mr. Merkin’s funds. Mr. Merkin sat on the board of some charities that took his money. Some have sued Mr. Merkin separately.

The Cuomo complaint alleges that in one presentation to an investor, Merkin said that only 15 percent of his “Ascot Fund” was invested with Madoff. In fact, the figure was 85 percent. Merkin also falsely told another investor that it was done through Morgan Stanley, and therefore protected, according to the complaint.

By 2008, Merkin was making about $25.5 million a year through annual fees from managing Ascot.

Merkin is also said in the complaint to have ignored several warning signs that Madoff’s returns were too good to be true, and was aware that Madoff used only a tiny accounting firm.

Separately, Bloomberg reports that Zuckerman himself has also sued Merkin. That suit, filed today, alleges:

Merkin represented that he ‘exercised reasonable care’ in selecting managers and made ‘periodic reviews. There is no way Merkin could make such a representation without learning basic facts about Madoff’s operation, including the fact that Madoff had not made any stock purchases for at least 13 years.

For an interesting primer on Merkin, see this recent New York magazine story.

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