New York Attorney General Eric Schneiderman was to ask a federal judge for permission to complete a $410 million settlement with J. Ezra Merkin, using his law enforcement powers to compensate the former Bernard Madoff investor’s victims.
The hearing was delayed until March 25, according to the court. Madoff brokerage liquidator Irving Picard, who seeks to collect $500 million from Merkin for different investors, 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.
Both sides were to have their say today before U.S. District Judge Jed Rakoff in Manhattan, who took over the case from a bankruptcy judge. 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.
The combatants portray their fight as a clash between state law, governing a top law enforcer, and bankruptcy law, regulating trustees in fraud cases. The hearing was delayed because of “a court conflict,” Amanda Remus, a spokeswoman for Picard, said today. Asked if the parties were trying to settle the dispute, she said, “There have been no settlement discussions of late and none are anticipated.”
James Freedland, a spokesman for Schneiderman, declined to comment on the adjournment or the possibility of settlement.
Picard has said that only he can sue investors who allegedly participated in Madoff’s fraud, compensating brokerage customers whose claims he has authorized. 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.
Schneiderman has accused Picard of using intimidation tactics to block the Merkin deal, and making “absurd” pronouncements about the settlement, which is sealed in court. 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.
David Ellenhorn, a lawyer for Schneiderman, 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, 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 pays only former Madoff brokerage customers who lost money. 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).