Mort Zuckerman's Fraud Claim Against Ezra Merkin Over Madoff May Proceed

Mort Zuckerman, chairman of Boston Properties Inc. and publisher of the New York Daily News, can continue his fraud suit against Ezra Merkin and his Gabriel Capital Corp. over $40 million in losses stemming from investments made with Bernard Madoff, a judge ruled.

New York state Supreme Court Justice Richard Lowe denied Merkin and Gabriel Capital’s motion to dismiss the fraud claim alleging that they failed to disclose Madoff’s role and misrepresented Merkin’s role in managing his Ascot Fund Ltd.

The offering documents “could be construed as misrepresenting that Merkin would be controlling and actively managing the funds, and concealing that Ascot Fund was a feeder fund to Madoff,” Lowe wrote in a May 5 ruling made public today.

Lowe dismissed Zuckerman’s negligent misrepresentation claim against Merkin and Gabriel. He also dismissed all claims against accounting firm BDO Seidman LLP, which issued audited financial statements for both Merkin’s Ascot Partners and Gabriel fund, and BDO Tortuga, a Cayman Islands based accounting firm.

In his suit, Zuckerman accused Merkin, the former GMAC Financial Services chairman, of placing his assets with Bernard L. Madoff Investment Securities LLC without his knowledge. Madoff is serving a 150-year prison term after pleading guilty last year to running a $65 billion fraud, the biggest Ponzi scheme ever.

$25 Million

The developer said he invested $25 million with Merkin’s Ascot Fund 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.

According to the judge’s written decision, Merkin met with Zuckerman in 2006 to persuade him to invest in the Ascot and Gabriel family of funds. He described Ascot Partners as a diversified fund, the judge wrote, “and made clear that the fund’s performance was dependent on his personal judgment and involvement.” According to Zuckerman, the Ascot Offering Memorandum failed to reveal that 100 percent of the fund was invested with Madoff, the judge said.

Andrew Levander, Merkin’s lawyer, didn’t immediately respond to an e-mail for comment after hours.

‘Without Merit’

When the suit was filed in April 2009, Levander called it “baseless and without merit.” At the time, he said, Ascot’s offering memorandum “specifically warned Mr. Zuckerman against the ‘lack of diversification,’” and did “not constitute a balanced investment plan.” He said Merkin’s due diligence “just like the detailed investigations performed by countless others, including regulators, was thwarted by the intricate, fraudulent scheme perpetuated by Madoff.”

CRT is a Cayman Islands corporation owned by the Mortimer Zuckerman Charitable Remainder Trust.

Merkin is the sole shareholder of GCC and general partner of Ascot Partners, LP, a hedge fund.

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

To contact the reporter on this story: Karen Freifeld in New York at kfreifeld@bloomberg.net

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