Merkin, N.Y. Reach $410 Million Madoff Lawsuit Settlement

New York settled a lawsuit for $410 million with J. Ezra Merkin over claims that Merkin funds secretly placed client money with Bernard L. Madoff.

The agreement provides $405 million to compensate investors and $5 million for the state, according to a statement yesterday by the office of New York Attorney General Eric Schneiderman. In the case, filed in 2009 by Schneiderman’s predecessor, Andrew Cuomo, the state claimed Merkin steered assets to Madoff and concealed Madoff’s role.

“Many New Yorkers entrusted their investments to Mr. Merkin, who then steered the money to Madoff while receiving millions of dollars in management and incentive fees,” Schneiderman said in the statement. “By holding Mr. Merkin accountable, this settlement will help bring justice for the people and institutions that lost millions of dollars.”

The state claimed in its complaint that Merkin betrayed hundreds of investors, including charities, that entrusted him with their savings by “recklessly” feeding their funds to Madoff’s Ponzi scheme while falsely claiming he actively managed their funds.

Madoff, who pleaded guilty to running an investment fraud that authorities say swindled investors of about $17 billion, is serving a 150-year prison sentence.

Four Funds

Merkin controlled four funds that invested more than $2 billion with Madoff on behalf of investors, according to Schneiderman. As a result of Madoff’s scheme, the investors in the funds -- Ariel Fund Ltd., Gabriel Capital LP, Ascot Fund Ltd. and Ascot Partners LP -- lost in excess of $1.2 billion, the office said. More than 10 percent of the assets obtained by Merkin belonged to charities and nonprofit organizations, Schneiderman said.

Andrew Levander, an attorney for Merkin, said in a statement that his client “is pleased to have achieved a resolution that is fair to his investors.”

“With this settlement, Ezra Merkin has made an enormous personal commitment to addressing his investors’ losses from Madoff’s unthinkable fraud,” Levander said.

Under the agreement, Merkin will pay $405 million to investors over a three-year period. Depending on the size of their losses, eligible investors will be entitled to more 40 percent of their cash losses, Schneiderman said.

Fund Receiver

Bart M. Schwartz, the receiver for Gabriel Capital and Ariel Fund, said in a statement that the settlement, which also resolves his claims against Merkin, will help bring investors in the funds closer to being made whole. Excluding the Merkin settlement, Schwartz has already distributed, or has moved for the authority to distribute, more than $500 million to investors in the Ariel and Gabriel funds.

The settlement provides for distributions to eligible investors in the Gabriel and Ariel funds, who elect to participate, of 42.5 percent of their net Madoff losses up to losses of $5 million, according to Schwartz’s statement. There is a provision for additional recovery for investors whose net Madoff losses exceed $5 million. Distributions to Ascot Fund investors will be made in the same proportions, according to Schwartz.

The case is People of the State of New York v. Merkin, 450879-2009, New York State Supreme Court, New York County (Manhattan).

To contact the reporter on this story: David McLaughlin in New York at dmclaughlin9@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net

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