New York Attorney General Eric Schneiderman asked a federal judge to let the state go forward with a $410 million settlement with J. Ezra Merkin, using his law enforcement powers to compensate Merkin investors whose money was lost in Bernard Madoff’s Ponzi scheme.
Madoff brokerage liquidator Irving Picard, who seeks to collect $500 million from Merkin for people who invested directly with Madoff, is trying to block the deal. Schneiderman has argued that Picard has no claim to the settlement money and lacks power as a bankruptcy trustee to stop the state from enforcing the people’s legal rights.
U.S. District Judge Jed Rakoff began a hearing in Manhattan federal court today by asking the parties to address the state’s argument that Picard had waited too long to try to block its suit. David Ellenhorn, a lawyer from Schneiderman’s office, told Rakoff that investors refrained from bringing their own claims against Merkin in reliance on the attorney general’s suit.
“There would be real prejudice -- not theoretical prejudice -- to real people with real claims” if Rakoff were to block the settlement, Ellenhorn said.
Investors in Merkin’s hedge funds lost more than $1.2 billion in the Madoff fraud, New York has said. Madoff, arrested in 2008, is serving 150 years in prison for the largest Ponzi scheme in U.S. history, which effaced an estimated $17 billion of investors’ principal.
Ellenhorn argued that Picard’s efforts, if successful, would leave Merkin’s investors with nothing. Rakoff suggested the law could require such a result.
“When someone like Madoff commits a fraud of this magnitude, an awful lot of people get screwed,” said Rakoff, who is considering Picard’s request for an order blocking the settlement. Rakoff said he will decide the question by April 15.
The combatants portray their deadlocked fight as a clash between state law, governing a top law enforcer, and bankruptcy law, regulating trustees in fraud cases. Rakoff took over the case from a bankruptcy judge to decide if Schneiderman can complete the deal with Merkin.
Amanda Remus, a spokeswoman for Picard, said earlier this month the parties hadn’t had talks to resolve the dispute “of late and none are anticipated.” James Freedland, a spokesman for Schneiderman, has declined to comment on the possibility of a truce.
Picard has said that only he can sue investors who allegedly participated in Madoff’s fraud, compensating brokerage customers whose claims he has authorized.
“We get to go first,” argued David Sheehan, who represents Picard. “We get the opportunity to try to bring that money in.”
New York sued Merkin to pay investors in his hedge funds who wouldn’t get paid by Picard because they weren’t Madoff customers. Schneiderman is trying to complete the settlement of that suit.
With Picard’s consent, the settlement agreement struck with Merkin was filed under seal in court after Merkin requested confidentiality for some material he provided.
Schneiderman has accused Picard of using intimidation tactics to block the Merkin deal, and making “absurd” pronouncements about the settlement. Picard accused Schneiderman of making an “end run” around bankruptcy law with the settlement.
Picard began by threatening to sue the attorney general if he didn’t “agree within 48 hours that the bankruptcy court would have exclusive jurisdiction” over the fight, Schneiderman said in court filings. Schneiderman refused, was sued and asked Rakoff to take the case.
Last month, Picard said Schneiderman made a secret agreement allowing Merkin to use some of the settlement money to help fend off Picard lawsuits demanding $500 million.
Ellenhorn told Rakoff it is “required, and appropriate” to pay Merkin’s lawyers for facilitating the settlement, which requires Merkin to give up $410 million of his personal assets. Most of the money will go to Ponzi victims after Schneiderman recoups $5 million for three years of litigation against Merkin, he said in a filing.
Picard has taken “far more” in fees for just this one case than the amount that will cover the costs of New York’s Merkin settlement, Ellenhorn said in the filing.
The Madoff trustee and his firm, Baker & Hostetler LLP, have run up total fees and expenses of about $390 million since the con man’s December 2008 arrest, according to court filings. The Securities Investor Protection Corp., which runs an insurance fund to compensate investors for losses, has paid the bills.
Picard, a bankruptcy lawyer, has challenged a state attorney general before. U.S. Bankruptcy Judge Burton Lifland sent him into mediation after his fight with California Attorney General Kamala Harris over her $270 million lawsuit against an alleged beneficiary of the Ponzi scheme. The mediation continues.
Separately, Merkin has said Picard is “extremely unlikely” to win his lawsuit against Merkin and his hedge 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, Merkin said in a filing.
Picard compensates only former Madoff brokerage customers who lost invested principal. Investors who took more money out of the brokerage than they put in don’t get paid. Nor do investors in hedge funds that funneled some of the money to Madoff, as New York accused Merkin’s funds of doing in the 2009 suit it settled.
New York’s suit alleged Merkin betrayed hundreds of investors, including charities, by “recklessly” feeding money to Madoff’s Ponzi scheme while falsely claiming he actively managed their funds. Merkin controlled four funds that invested more than $2 billion with Madoff, according to Schneiderman.
The case is Picard v. Schneiderman, 12-cv-06733, U.S. District Court, Southern District of New York (Manhattan).