June 30 (Bloomberg) -- The financier Ezra Merkin, sued by New York Attorney General Andrew Cuomo over his role as a provider of client funds to convicted money manager Bernard Madoff, is selling Mark Rothko paintings and other artwork that had been frozen in the litigation for $310 million.

Merkin and his wife, Lauren, entered into a sales contract, subject to Cuomo’s approval, and agreed to put the net proceeds in escrow, pending the outcome of the lawsuit, according to a court filing.

“As Mr. Merkin continues to defend against the actions brought against him by the New York attorney general and others, he and his wife have decided to sell the core of their art collection in a private sale,” Andrew Levander, counsel to Merkin, said in an e-mailed statement. “The Merkins believe the lawsuits are without merit and have agreed, without prejudice to their rights, to place the net proceeds of the sale in escrow while the litigation continues.”

The proposed deadline for the private sale is July 15. The sale will yield about $191 million, after liens, taxes and fees, which will go into escrow, according to Cuomo. The buyer hasn’t been identified.

“This will preserve assets that, if our litigation is successful, will provide restitution to victims of Mr. Merkin’s alleged fraud,” Cuomo said in a statement.

Concealing Investments

Cuomo said he will continue to seek “full recovery for investors’ losses” through the suit, which charges Merkin with concealing the investment of more than $2.4 billion with Bernard L. Madoff Investment Securities LLC.

Merkin’s lawyers said they would move to dismiss Cuomo’s claims tomorrow.

State Supreme Court Justice Richard Lowe, who is in charge of the case, indicated he would sign the order allowing the art sale, according to attorney David Pitofsky, who said Lowe also approved his appointment as receiver for Ascot Partners LP, a Madoff feeder fund.

The judge earlier agreed to the appointment of Bart Schwartz as receiver for the Ariel and Gabriel groups of funds.

According to court papers, there is a lien on artworks held by PaceWildenstein LLC, as agent for Rothko’s children, Kate Rothko Prizel and Christopher Rothko, for $42 million, and a lien held by HSBC Bank USA NA for $19.3 million on certain property, including 14 lesser works of art.

Advising Fees

In addition, PaceWildenstein will receive a fee of $11 million for advising the buyer, and TLIA LLC will get $26.5 million for advising the seller, according to court papers.

“In a $310 million transaction, advisory fees of 5 to 10 percent would not generally seem to be out of the ordinary,” said art lawyer Thomas C. Danziger of Danziger, Danziger & Muro, LLP. “However given the actual dollars involved -- $37.5 million in fees -- and the fact that proceeds are to be used for restitution for Madoff victims, many would view the fees as excessive.”

Of the $211 million left, $19.2 million will be taken out for taxes expected to be due on the sale of the art, as well as other expenses, including legal fees directly related to the sale.

Christie’s International Plc, which conducted an appraisal, said the purchase price was fair, according to court papers.

Assembled Collection

The Merkins assembled their collection between 2003 and 2008 with the assistance of adviser Ben Heller. They acquired seven major paintings by Rothko from the artist’s estate in a deal brokered by PaceWildenstein.

Andrea Glimcher, a Pace spokeswoman, declined to comment. Heller declined to comment.

Merkin owned five other Rothko paintings, according to Heller, including an electric blue oil on paper purchased at Sotheby’s in 2007 for $7.9 million.

The Merkins also owned two sculptures by Alberto Giacometti worth around $20 million, according to a dealer familiar with the collection. The Giacometti bronzes were acquired from dealers, and include the slender solo female figure, “Femme de Venise,” as well as “The Glade” featuring a cluster of tiny figures.

The Merkins’ Park Avenue apartment was also adorned with major African art as well as objects from Japan and China.

Bolsters Confidence

Amid one of the roughest seasons for the art market, news of the $310 million sale is bolstering confidence among dealers.

The Merkin deal is $100 million more than the combined total for Sotheby’s and Christie’s major New York contemporary- art auctions, which tallied $200.9 million in May.

“In this environment, the fact that a transaction can take place at this level obviously shows that there is still confidence in the art market,” said private New York dealer Christopher Eykyn.

Earlier this month, Irving Picard, the trustee liquidating Madoff’s firm, asked a judge for an order forcing Merkin to transfer to the bankruptcy court any remaining money held by his Ascot Partners fund. The trustee said the order was needed to block Ascot assets from being moved by any receiver who may be appointed by Cuomo.

“We’re aware of what happened,” with Merkin’s art sale, Picard said in a phone interview.

Picard said in an e-mailed statement that the release of funds from the escrow account “will require a court application and order.”

The case is New York v. Merkin, 450879/2009, New York state Supreme Court (Manhattan.)

To contact the reporters on this story: Karen Freifeld in New York at kfreifeld@bloomberg.net; Lindsay Pollock in New York at lindsaypollock@yahoo.com.

Last Updated: June 30, 2009 18:35 EDT