Madoff Trustee’s Merkin Claims ‘Absurd,’ New York Says

The trustee for Bernard Madoff’s bankrupt firm made “absurd” claims about money being withheld from the Ponzi scheme’s victims while fighting to stop a $410 million settlement, a lawyer for New York Attorney General Eric Schneiderman said.

Trustee Irving Picard said last month that the settlement, negotiated by Schneiderman with former Madoff investor J. Ezra Merkin, will allow Merkin to use money stolen from customers to help fend off Picard lawsuits demanding $500 million. A lawyer for Picard called Merkin’s $410 million agreement to compensate victims, sealed in federal court in Manhattan, “illusory.”

“That is absurd,” David Ellenhorn, a lawyer for Schneiderman, told U.S. District Judge Jed Rakoff yesterday in a court filing. While lawyers defending Merkin in other cases will be paid, and Schneiderman will recoup $5 million for three years of litigation against Merkin, most of the money will go to Ponzi victims, he said.

“All of the remaining settlement funds, out of the $410 million, will be used to compensate victims of Merkin’s wrongdoing,” Ellenhorn said. “Not one penny will revert to Merkin.”

Paying Merkin’s lawyers who are facilitating the settlement, which requires the former Madoff investor to give up $410 million of his personal assets, is “required, and appropriate,” Ellenhorn said.

‘Extremely Unlikely’

Separately, Merkin said Picard is “extremely unlikely” to win his own lawsuit against Merkin and his funds. Rakoff shouldn’t allow the trustee to block the settlement because “in the unlikely event” that Picard does win part of his suit, Merkin’s funds would still be able to pay him, he said in a filing.

Both Merkin and the attorney general made additional filings in the case citing Picard’s “unusual” and “extraordinary” request for an injunction to give him time to build his own suit against Merkin.

Two Merkin funds, “Gabriel and Ariel, whose assets are approximately $500 million each, have more than sufficient assets to satisfy any potential judgment the trustee could obtain on his claims against them of $17.4 million and $16.2 million, respectively,” Merkin said.

A third fund, Ascot, is owed money by the trustee or at worst would be short by only $8 million to pay him, he said.

Two Years

Picard’s chances of winning were slim, Schneiderman and Merkin both said. Merkin noted that Rakoff had already ruled that bankruptcy law limits the trustee to taking back money invested only in the two years before a Ponzi scheme’s collapse, “and then only upon a showing that the funds were willfully blind to Madoff’s fraud.” He denied that was the case.

“It is utterly specious for the trustee to pretend that the claims in the NYAG action against Merkin are ‘inextricably intertwined’ with the trustee’s claims,” said Schneiderman, who has argued that Picard has no legal right to stop the settlement because Merkin’s money doesn’t belong to the Madoff estate.

The case is Picard v. Schneiderman, 12-cv-06733, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: 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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