Madoff Trustee Sues New York to Stop Merkin Settlement

The liquidator of Bernard Madoff’s estate seeks to stop New York Attorney General Eric Schneiderman from completing a $410 million settlement with a former Madoff investor that the trustee said might leave little for customers of the convicted Ponzi scheme mastermind.

Schneiderman in June agreed to settle a state lawsuit against the investor, J. Ezra Merkin, for $410 million. The agreement provides $405 million to compensate investors and $5 million for the state. In the suit, filed in 2009 by Schneiderman’s predecessor, Andrew Cuomo, the state claimed Merkin and his funds secretly steered assets to Madoff and concealed Madoff’s role, harming investors.

“Merkin’s money is not limitless, and with the prospect of over $400 million depleted through the settlement, the trustee is concerned that little or nothing will be left for BLMIS customers,” Irving Picard, the trustee liquidating Madoff’s brokerage, said yesterday in a bankruptcy court filing in Manhattan.

Asking the federal judge in Manhattan to impose a preliminary injunction against Schneiderman, using bankruptcy law, he said, “If other attorneys general around the country could simply walk into state courts and secure settlements as the NYAG did, the BLMIS estate would be decimated, with residents of various states favored.”

Bernard L. Madoff Investment Securities LLC, or BLMIS, is the defunct Madoff firm.

Without Merit

“We believe this effort by Mr. Picard to prevent the attorney general from distributing $410 million to investors who were victimized by Mr. Merkin is inappropriate and without legal merit and we will take all necessary steps to oppose it,” said Jennifer Givner, a spokeswoman for Schneiderman, in an e-mail.

According to Picard, $200 million of Merkin’s settlement money is already sitting in an escrow account with BNY Mellon NA, awaiting completion of the deal with Schneiderman. The judge should stop Merkin from paying out any more, because of the “imminent danger” that his assets will be “dissipated,” Picard said.

The trustee’s own lawsuit against Merkin and his Gabriel and Ariel funds demanded $500 million that he alleged was fraudulently taken out of the Madoff brokerage.

Merkin’s funds “expect to receive substantial distributions from the Madoff bankruptcy estate rather than owe money to it,” said Andrew Levander, a lawyer for Merkin. He was “disappointed” by Picard’s effort “to interfere with the settlement,” he said. The receiver liquidating Merkin’s funds, Bart Schwartz, said it was a fair settlement.

Picard Argument

Picard has said that under bankruptcy law he has sole right as trustee to sue former Madoff investors who allegedly knew of the fraud, using the proceeds to pay customers whose claims he has authorized. U.S. Bankruptcy Judge Burton Lifland has stopped most of the rival suits by private individuals. Schneiderman is only the second government official whom Picard has gone to court to stop.

In January, the trustee sued California Attorney General Kamala Harris, alleging her $270 million lawsuit against a former Madoff investor’s estate interfered with the collection of assets needed to help compensate Madoff victims. The combatants portrayed their fight in court filings as a clash between federal bankruptcy law, which describes a trustee’s powers in fraud cases, and state law, governing a state’s top law enforcer.

Picard accused Harris of trying to benefit local investors at the expense of the con man’s other customers. Last month, Lifland said the two sides will use mediation to try to settle the dispute.

In his latest request to Lifland, Picard said that under bankruptcy law and the rules for liquidating a brokerage, “every victim should be treated equally.”

‘Grievously Damaged’

He accused Schneiderman of “seeking pecuniary relief for a select subgroup of indirect investors, in a fraud that has grievously damaged victims throughout this country and around the world.”

“Put simply, the State of New York should not be permitted to wreak havoc on that long standing federal mandate by using New York State law to give its citizens and perhaps others in a select group a jump start over all of the victims of this heinous fraud,” he said.

Madoff is serving a 150-year sentence after pleading guilty to a fraud that wiped out $17 billion of customers’ principal. Picard has raised around $9 billion for customers, mostly from settlements, although some of it is still tied up in court challenges.

The case is Picard v. Schneiderman, 12-01778, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Dawn McCarty in Wilmington at dmccarty@bloomberg.net Linda Sandler in New York at lsandler@bloomberg.net.

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

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