9/1/13

WSJ: Trustee Claims J. Ezra Merkin Knew Madoff's Business Was a Ponzi Scheme

The Wall Street Journal reported:

Suit Claims Merkin Knew Madoff's Business Was a Fraud
Money Manager 'Willfully Blinded' Himself to Clues About Ponzi Scheme, According to Madoff Trustee
By CHAD BRAY

Money manager J. Ezra Merkin, who funneled hundreds of millions of dollars to Bernard Madoff, who pleaded guilty to operating a Ponzi scheme, knew that Mr. Madoff's results were impossible and his advisory business was "predicated on a fraud," according to the trustee seeking to recover funds for Madoff victims.

In an amended lawsuit filed late Friday, lawyers for Irving Picard, the court-appointed trustee for Mr. Madoff's firm, said Mr. Merkin "willfully blinded" himself to a variety of indications that Mr. Madoff was engaged in a fraud and that Mr. Merkin enabled the fraud scheme. Mr. Merkin did so despite acknowledging in conversations with Mr. Madoff and others that Mr. Madoff's results were consistent with a Ponzi scheme, Mr. Picard said.

Mr. Merkin has never been charged with committing a crime related to the Madoff scheme.

"In desperation to meet a legal burden he cannot meet, Mr. Picard has concocted allegations that he cannot prove," said Andrew Levander, Mr. Merkin's lawyer. "These allegations are utterly baseless. Indeed, Mr. Merkin personally lost more than $100 million in Madoff's fraud."

Mr. Picard faced a Friday deadline to file an amended complaint in the case. The amended complaint contains some new allegations alongside a host of others that have surfaced previously in earlier lawsuits.

The new filing comes as Mr. Picard is attempting to block a $410 million settlement reached between Mr. Merkin, the former chairman of GMAC Financial Services, and New York Attorney General Eric Schneiderman. Mr. Picard has contested several settlements reached with feeder funds, saying those deals could hurt his ability to collect funds for victims who invested directly with Mr. Madoff's firm.
"Time after time, when confronted with evidence that [Madoff's firm] was a fraud, Merkin did not deny it or attempt to explain. Instead, he openly admitted that [Madoff's] results were impossible and defied any legitimate explanation," David J. Sheehan, Mr. Picard's lawyer, said in the lawsuit.

Mr. Picard is seeking to recover at least $560 million that was withdrawn from the Madoff estate by Mr. Merkin's Gabriel Capital Corp. and its various funds over a 13-year period before Mr. Madoff's fraud came to light in December 2008. Mr. Merkin's funds allegedly collected at least $256.2 million in management and incentive fees associated with the Madoff investments, according to the lawsuit.
Mr. Madoff is serving a 150-year sentence after admitting in March 2009 to running a decadeslong fraud.

According to the trustee's lawsuit, Mr. Merkin allegedly used his access to seek permission to invest hundreds of millions of dollars in additional investor funds with Mr. Madoff's firm in May 2000, when Mr. Madoff was supposedly not open to accepting new accounts.

Mr. Merkin also allegedly commingled investor funds with his own funds at Gabriel, using at least $92 million from a commingled account to purchase artwork by Mark Rothko and other artists, according to Mr. Picard's lawsuit.

In fall 2005, Mr. Merkin allegedly voiced his concerns that Mr. Madoff's business was a fraud after it came to light that Sam Israel III's Bayou Group was a Ponzi scheme, according to Mr. Picard's lawsuit.

"You know, I always tell people, as soon as there is a scam in the hedge-fund industry, someone is going to call about Bernie. It's guaranteed," Mr. Merkin allegedly told Mr. Madoff in a conversation recorded at the time by Mr. Merkin, according to the trustee's lawsuit.

Two years earlier, Mr. Merkin also conceded that Bernard L. Madoff Securities might be a Ponzi scheme in a meeting with representatives from a research company, telling them to never "go long in a big way" with Madoff, according to Mr. Picard's lawsuit. He also allegedly acknowledged the impossibility of Mr. Madoff's purported trading, given the large options trades Mr. Madoff was purportedly engaging in.

He allegedly quipped at the time that "Charles [Ponzi] would lose out because it would be called the 'Madoff Scheme,' " according to the trustee's lawsuit.

Mr. Merkin allegedly acknowledged in conversations with a Madoff feeder fund that he was aware of concerns that the options market didn't have the volume to sustain Mr. Madoff's trading, according to Mr. Picard's lawsuit.

"Understanding Madoff is like finding Pluto…you can't really see it," Mr. Merkin said, according to the lawsuit. "You do it through inference, its effect on other objects."

He even allegedly compared Mr. Madoff to the Wizard of Oz when a representative for the feeder fund said, "Toto is still tugging at the curtain."

"The curtain is winning," Mr. Merkin said, according to the trustee's lawsuit.

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