Class Action suit against Gabriel Capital
Madoff Mess Hits Hedge Funds
Ruthie Ackerman, 12.17.08, 05:50 PM EST
The losing streak continues as investors in money managers try to get back their money.
The lawsuits are beginning to pile up and it's not just alleged Ponzi-scheme con artist Bernard L. Madoff that's in hot water -- so are the money managers that invested with him.
On Wednesday, Abbey Spanier Rodd & Abrams announced a class action lawsuit on behalf of clients who invested money in Gabriel Capital, run by the chairman of GMAC Financial Services, J. Ezra Merkin, between Dec.12, 2002 and Dec. 12, 2008.
The complaint alleges that Gabriel Capital, Merkin and Gabriel's auditor BDO Seidman committed common law fraud, negligently misrepresented clients, and breached fiduciary duties by acting "recklessly" or with "gross negligence" by permitting at least 27.0% of its capital to be "invested" with Madoff. The complaint goes on to say that Seidman failed to catch the "red flags" that should have been raised by investing a significant portion of capital with one fund.
Another lawsuit came on Tuesday when New York Law School sued Ascot Partners, another investment partnership managed by Merkin, after it invested $3.0 million with Ascot in 2006, which is now worth nothing.
"I think this is essentially about looking for deep pockets," said Michael Goldberg, a shareholder at Akerman Senterfitt, who specializes in unraveling Ponzi schemes. "It's pretty clear that going directly against Madoff and his entities is going to be pointless from a collection standpoint."
Last week, the Securities and Exchange Commission charged Bernard L. Madoff Investment Securities and its founder with running the world's largest Ponzi scheme, with losses estimated at $50.0 billion. (See "Mad Madoff.") The SEC said Madoff had indicated to two of his senior employees that he had been been "paying returns to certain investors out of the principal received from other, different investors" for years. (See "Fleeced Madoff Investors Face Cold Winter.")
The Securities Investor Protection Corporation, an organization that compensates investors if the funds they invest with go bankrupt, will cover securities up to $500,000 and cash up to $100,000. But Goldberg believes the majority of investors with Madoff will not qualify since most went through Madoff's advisory entity, not his broker-dealer, which was protected by the organization.
Goldberg said that investors who couldn't recover anything from Madoff's firm will likely go after those that advised them to invest with Madoff in the first place.
But a 2006 lawsuit against Hennessee Group by investors in the failed hedge fund Bayou Management was tossed out after the judge ruled Hennessee, which claims to perform due diligence for hedge fund investors, was just as duped as the Securities and Exchange Commission and everyone else to Bayou's deceptions. (See "Inside The Madoff Mysteries.") Bayou collapsed in 2005 and was eventually revealed to be a Ponzi scheme. The Hennessee ruling is being appealed, with arguments set for January.
Goldberg said that the Hennessee case won't block clients of hedge funds who invested with Madoff from bringing common law fraud or negligence charges against the funds. The result could be massive lawsuits, which, if successful, would make hedge funds responsible for reimbursing investors.
One fund that may be open to suits is Rye Investment Management, a division of hedge-fund firm Tremont Group Holdings, which seems to have lost $3.1 billion, virtually all of the money it manages, to Madoff. (See "Tremont's Rye Burned By Madoff.")
Tremont said it had "exercised appropriate due diligence in connection with the Madoff investments."
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