April 6 (Bloomberg) -- Mort Zuckerman, chairman of Boston Properties Inc. and publisher of the New York Daily News, sued Ezra Merkin and his Gabriel Capital LP over $40 million in losses stemming from investments made with Bernard Madoff.

Zuckerman today accused Merkin, the former GMAC Financial Services chairman, of placing his assets with Bernard L. Madoff Investment Securities LLC without his knowledge. Madoff, 70, was convicted on federal charges last month of using his firm to run a $65 billion fraud, the biggest Ponzi scheme ever.

The developer said he invested $25 million with Merkin’s Ascot Fund Ltd. in 2006 through his Charitable Remainder Trust, or CRT Investments Limited. Zuckerman said he also personally invested $15 million with Merkin’s Gabriel Capital. On Dec. 12, the day after Madoff’s arrest, Merkin sent Zuckerman two facsimiles, informing him the money was invested with Madoff and was “likely gone,” according to court papers.

“Zuckerman was stunned,” according to his complaint filed in New York state court. “Over the previous three years, Zuckerman and Merkin had a close relationship.” Merkin became “a trusted investment advisor,” and Zuckerman invested “in excess of $100 million in various Merkin-sponsored ventures.”

Merkin Confronted

The developer said he confronted Merkin and “demanded to know how Merkin could have failed to reveal that he was turning over 100 percent of the Ascot money to Madoff,” according to court papers. “Merkin did not deny his failure to reveal the truth but merely responded, ‘It may have been connected to something I said several years earlier.’”

Zuckerman said he replied, “That’s preposterous.”

“Never once during their numerous meetings and calls did Merkin mention to Zuckerman the name Madoff,” Zuckerman said in the complaint filed in New York State Supreme Court in Manhattan.

Zuckerman’s lawsuit “is entirely baseless and without merit,” Andrew Levander, Merkin’s attorney, said in an e-mailed statement. Levander said that while Zuckerman alleges he was told that Ascot Partners would be invested in a “diversified range of investments,” Levander said the offering memorandum “specifically warned Mr. Zuckerman against the ‘lack of diversification,’” and did “not constitute a balanced investment plan.”

‘Extensive Due Diligence’

“Contrary to Mr. Zuckerman’s allegations, Mr. Merkin performed extensive due diligence on Madoff and his trading strategy,” Levander said. “Unfortunately, Mr. Merkin’s due diligence, just like the detailed investigations performed by countless others, including regulators, was thwarted by the intricate, fraudulent scheme perpetrated by Madoff.”

New York Attorney General Andrew Cuomo also sued Merkin today in New York State Supreme Court over claims the financier placed assets in funds he controlled with Madoff without investors’ knowledge. Cuomo accused Merkin of secretly steering $2.4 billion to Madoff, Cuomo said in a statement.

Levander said that lawsuit also is without merit.

Zuckerman’s lawsuit includes claims of fraud against Merkin and Gabriel Capital and negligent misrepresentation over CRT’s $25 million investment in Ascot Partners. He said his agreement with Gabriel Capital contains an arbitration clause against Merkin for his lost personal $15 million investment. He seeks unspecified punitive damages.

Other Enablers

“Merkin’s fraudulent scheme had other enablers,” Zuckerman said in his complaint, which also named the accounting firm BDO Seidman LLP and a related entity called BDO Tortuga as defendants. Zuckerman said he relied upon the auditors’ financial statements that Merkin’s financial statements were “clean” and they turned out to be “utterly false and misleading and the auditors failed to warn plaintiffs of Ascot’s total devotion to Madoff.”

Jerry Walsh, a spokesman for BDO Seidman, didn’t immediately respond to an e-mail message sent after business hours.

Zuckerman said that he first learned Merkin had made the Madoff-related investments on Dec. 12, when Merkin sent him two faxes.

The first Merkin fax “revealed that ‘substantially all’ of Ascot Fund was invested with Madoff and likely was lost,” Zuckerman said. “The second revealed that about 30 percent of Gabriel Capital had been given to Madoff and was likely gone,” the complaint said.

“Merkin represented that he ‘exercised reasonable care’ in selecting managers and made ‘periodic reviews,’” Zuckerman said. “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.”

Bank Leumi

The developer said he first was introduced to Merkin in September 2005 when Merkin was attempting to assemble a group of investors to acquire Bank Leumi in Israel.

Zuckerman said he was “impressed with Merkin’s business acumen” and that the two men “struck up a business friendship.” Zuckerman said that in 2006 he agreed to provisionally commit $50 million to the Merkin-led effort to acquire Bank Leumi, in a deal that was never realized.

Merkin also continued to lobby Zuckerman to invest additional money with him after 2006, the developer said in the complaint. The two men met several times afterward, he said.

New York University, which had $94 million invested in Merkin’s Ariel Fund Ltd., sued Merkin and Gabriel Capital in December claiming $24 million in Madoff-related losses. NYU, the largest private university in the U.S. by enrollment, said in a Dec. 23 complaint that it lost the funds after Merkin invested the school’s money with the Madoff firm without disclosing the fact and after school officials objected.

Class Actions

Class action, or group lawsuits, were also filed against Merkin in U.S. District Court in Manhattan in December. The Calibre Fund, which invested $10 million with Merkin’s Ascot Partners LP, and other Merkin investors alleged in federal complaints that he misled them by claiming he invested in a “diverse portfolio of securities.”

Zuckerman said in his suit that Merkin charged him a 1.5 percent fee for handling the funds and imposed significant “lock-up restrictions on redemptions.”

“If an Ascot investor, like Zuckerman, wanted Madoff to invest his money, he could have gotten this service for free with superior additional terms and by-passed Merkin,” Zuckerman said.

Zuckerman claimed in this suit that Merkin had a “huge incentive not to disclose Madoff’s role, especially to investors like Zuckerman,” because Merkin charged clients “substantial fees” to manage both his Ascot Partners LP and Gabriel Capital.

Madoff is awaiting sentencing and may receive as much as 150 years in prison.

The case is CRT Investments Ltd. v. J. Ezra Merkin, 601052/2009, filed in New York State Supreme Court (Manhattan).

To contact the reporter on this story: Patricia Hurtado in New York State Supreme Court in Manhattan at pathurtado@bloomberg.net.

Last Updated: April 6, 2009 19:50 EDT