Cuomo Seeks Ruling Against Merkin Over Madoff Fraud

New York Attorney General Andrew Cuomo asked a judge to rule without trial that Ezra Merkin and his Gabriel Capital Corp. engaged in fraud by secretly placing client funds with swindler Bernard Madoff.

Cuomo, who sued Merkin in 2009 for steering $2.4 billion to Madoff in exchange for millions of dollars in fees, filed a motion for summary judgment Oct. 18 in New York state Supreme Court in Manhattan. Madoff is serving 150 years in prison after pleading guilty in 2009 to running the biggest Ponzi scheme ever.

The “undisputed evidence” establishes that Merkin and Gabriel induced hundreds of people to invest in funds he controlled by not disclosing that the funds were managed by Madoff, according to the filing. There was misrepresentation and concealment in offering memos, quarterly investor letters and personal meetings, the filing said.

“The attorney general has established that defendants engaged in ‘deceitful practices’ in violation of the Martin Act and Executive Law,” the motion says, citing the state securities fraud statute and the law governing persistent fraud or illegality.

‘Entirely Unfounded’

Andrew Levander, an attorney who represents Merkin, said in an e-mailed statement that Cuomo’s motion for summary judgment was “entirely unfounded” and should be denied. He also reiterated today that the case was without merit.

“Indeed, discovery has shown that investors in the Ascot, Gabriel and Ariel funds were not misled in connection with their investments,” Levander said, referring to Merkin’s funds Ascot Fund Ltd., Ascot Partners, Ariel Fund Ltd., and Gabriel Capital LP.

Merkin, 57, and Gabriel also breached their fiduciary duties to investors by not disclosing and investigating signs that something was amiss with Madoff’s fund, according to Cuomo’s filing.

The attorney general is seeking $729 million in restitution of fees, unspecified restitution for investor losses as a result of Madoff’s fraud, and an order prohibiting Merkin from acting as an investment adviser or money manager in the future.

Payment of Judgments

In a separate Oct. 18 filing, Cuomo told the court that a June 2009 order freezing Merkin and Gabriel’s assets doesn’t permit the payment of judgments while the case is pending, nor should it be modified.

Investors seeking judgments for arbitration awards against Merkin disagreed.

“It would be fundamentally unjust and unfair -- and legally without justification -- to deprive Dr. Wiederhorn of his right to an immediately executable judgment any longer,” Noel Wiederhorn’s attorney, David Bamberger, wrote the court.

Wiederhorn is seeking a judgment on a $1.75 million award in arbitration against Merkin filed before Cuomo’s suit, according to Bamberger.

Sandalwood Debt Funds A and B, which also are awaiting potential judgment on a $12.7 million arbitration award obtained against Merkin, urged the court to disregard Cuomo’s argument as well.

“The court should reject this attempt to impinge on the rights of those investors who have most diligently pursued their rights,” attorney Laurence B. Orloff wrote on behalf of Sandalwood.

Prominent Charities

Investors including prominent charities entrusted their funds to Merkin. Institutions that have alleged they were hurt by Merkin’s investments with Madoff include New York University, Yeshiva University and New York Law School.

When Madoff was arrested in December 2008, account statements reflected 4,900 accounts with $65 billion in nonexistent investments, according to Irving Picard, the trustee overseeing the Madoff bankruptcy.

The Cuomo case is New York v. Merkin, 450879/2009, New York state Supreme Court (Manhattan.) The other cases are Noel M. Wiederhorn, MD v. Merkin,601265/2010, and Sandalwood Debt Fund v. Merkin, 651441/2010, New York state Supreme Court.

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

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

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