N.Y. Wins Right to Finish $410 Million Merkin Settlement

New York Attorney General Eric Schneiderman can 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, a judge ruled.

Madoff brokerage liquidator Irving Picard, who seeks to collect $500 million from Merkin for a different set of the con man’s investors, tried block the deal. He waited too long to do so, only threatening to seek a halt, U.S. District Judge Jed Rakoff in Manhattan ruled today. He dismissed what he called Picard’s entire effort to “derail” the accord.

“The trustee, however, having for more than three years issued empty threats to seek a halt to the attorney general’s suit, has lost his right to complain,” Rakoff wrote. “Even on the merits, moreover, his bluster proves to be without substance.”

Picard plans to “pursue an appeal immediately,” Amanda Remus, a spokeswoman for Picard, said in an e-mail.

The ruling “is a victory for justice and accountability for many victims of Madoff’s Ponzi scheme,” Schneiderman said today in a statement.

The combatants portrayed their dispute 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 could complete the deal with Merkin.

Picard’s Position

Picard has said that only he can sue investors who allegedly participated in Madoff’s fraud, compensating 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 brokerage customers.

Rakoff rejected Picard’s argument that money Merkin paid to settle New York’s suit was “stolen” from Madoff brokerage customers, as Picard argued. Even before doing so, Rakoff said he was guided by the legal principle that “prohibits unreasonable, inexcusable and prejudicial delay” in asserting one’s rights.

“Although aware from the outset of the NYAG’s action, which was publicly filed in April 2009, the trustee sought no judicial action to stay the NYAG’s action until the filing of the instant action in August 2012, more than three years later,” Rakoff wrote.

Investor Hardship

At a court hearing last month, David Ellenhorn, a lawyer from Schneiderman’s office, told Rakoff that halting the deal would cause hardship to investors in Merkin’s hedge funds who refrained from bringing their own claims against Merkin in reliance on the attorney general’s suit.

The Merkin funds, which funneled money to Madoff, cost investors more than $1.2 billion in the 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.

Schneiderman accused Picard of using intimidation tactics to try to stop the Merkin deal, and making “absurd” pronouncements about the settlement. Picard accused Schneiderman of making an “end run” around bankruptcy law with the settlement.

“We get to go first,” David Sheehan, who represents Picard, told Rakoff at the hearing. “We get the opportunity to try to bring that money in.”

Lawsuit Threat

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.

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 this case than the amount that will cover the costs of New York’s Merkin settlement, Ellenhorn said in a filing.

Legal Fees

The Madoff trustee and his firm, Baker & Hostetler LLP, have run up total fees and expenses of about $390 million since the confidence 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.

Who’s Compensated

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 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).

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