Dec. 31 (Bloomberg) -- Sterling Stamos Capital Management LP, a New York-based investment firm, told clients that seven of its funds had indirect investments with Bernard Madoff, the financier who ran an alleged $50 billion Ponzi scheme.

The firm’s funds, which invest in other hedge funds, were tied to Madoff through Ezra Merkin’s Gabriel Capital Group, Chairman Peter Stamos said in a letter dated yesterday. Six of its funds allocated from 1.5 percent to 3 percent of assets to Gabriel as of Dec. 1. A seventh, which is in the process of being liquidated, had more assets with Madoff, the letter said without disclosing the percentage.

“We are deeply dissatisfied with Gabriel Capital Group,” Stamos wrote in the letter. Gabriel was the only manager of more than 100 Sterling Stamos invests with that had money with Madoff, he said.

Clients of Madoff had about $37 billion with his firm, according to a Bloomberg tally that might include some double counting. Before his arrest in New York on Dec. 11, Madoff, 70, confessed to employees that his scheme may have cost investors as much as $50 billion, according to an FBI complaint. Sterling Stamos’s losses were reported today by CNBC.

Sterling Stamos, which manages $6 billion, was invested in two Gabriel funds, Gabriel LP and Ariel Fund Ltd. On Dec. 12, Sterling Stamos issued a statement saying it had no direct holdings with Madoff.

Merkin, also the chairman of GMAC LLC, the finance arm of General Motors Corp, told investors on Dec. 18 that he was winding down the $1.5 billion Gabriel LP fund, which lost 39 percent this year through Nov. 30. The process will take several years to complete because the assets are illiquid.

Merkin has been sued by New York University and New York Law School over his investments with Madoff. The university alleged that Merkin invested its money with Madoff without telling investors or doing proper due diligence.

To contact the reporters on this story: Katherine Burton in New York at kburton@bloomberg.net; Joi Preciphs in Washington at jpreciphs1@bloomberg.net.

Last Updated: December 31, 2008 14:40 EST