Hedge Fund Manager Who Invested Heavily With Madoff Agrees to Cede Control

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Hedge Fund Manager Who Invested Heavily With Madoff Agrees to Cede Control


By ZACHERY KOUWE
Published: May 19, 2009
J. Ezra Merkin, the prominent New York financier who lost more than $2.4 billion of his clients’ money in Bernard L. Madoff’s Ponzi scheme, agreed on Tuesday to cede control of three of his hedge funds to a liquidator.


The move comes at the request of New York’s attorney general, Andrew M. Cuomo, who last month charged Mr. Merkin with lying to his clients about how he was investing their money.

At a hearing in New York State Supreme Court on Tuesday, Justice Richard Lowe gave Mr. Cuomo’s office and Mr. Merkin’s lawyers until May 28 to complete the agreement. Under the preliminary deal, Mr. Merkin will hand day-to-day control of two funds, Ariel and Gabriel, to Guidepost Partners, which will oversee the liquidation of more than $1 billion in assets remaining in the funds.

Many of the assets in the funds are hard to sell, and most are managed by other subadvisers, including the private equity fund Cerberus Capital Management.

Control of Mr. Merkin’s Ascot Fund, which invested nearly all of its assets with Mr. Madoff, will be turned over to David Pitofsky, a litigation lawyer who was once a corporate fraud investigator for the federal prosecutor’s office in New York. The fund, whose investors included Tufts University, Bard College and Yeshiva University, had $1.7 billion invested with Mr. Madoff. While there is little left in the Ascot fund, Mr. Pitofsky will oversee any recovery efforts.

“As part of his continuing efforts to maximize the returns to investors in the funds, Mr. Merkin has agreed in principle to appoint Guidepost Partners, a leader in global investigations, security and compliance, as the receiver for the funds while he remains available to consult regarding the wind-down at no cost to the funds,” Andrew J. Levander, a lawyer for Mr. Merkin, said in a statement.

Mr. Cuomo’s complaint does not accuse Mr. Merkin of knowing about Mr. Madoff’s vast fraud. But it charged that he had failed to carry out the diligent research and investigation he had promised, and in some cases had deliberately deceived clients about his investments with Mr. Madoff, beginning in 1992.

“Merkin’s deceit, recklessness, and breaches of fiduciary duty have resulted in the loss of approximately $2.4 billion,” according to the complaint filed by Mr. Cuomo’s office in April, which opened an investigation of Mr. Merkin soon after the Madoff scheme collapsed in mid-December.

Mr. Levander has called the charges “hasty and ill-conceived” and said Mr. Merkin would defend himself vigorously.

Mr. Merkin, the former chairman of GMAC, is also being sued by New York University, which requested months ago that he relinquish control over the Ariel fund. The university, which lost $24 million of its investment in Ariel, is suing Mr. Merkin for turning over a portion of its money to Mr. Madoff without disclosing the arrangement to Ariel’s investors. The Ariel fund is not related to Ariel Investments of Chicago.

Beth Kaswan, a lawyer for N.Y.U., said the university is reviewing the proposed agreement.

Mr. Merkin collected more $470 million for managing three funds, Ariel, Gabriel and Ascot Partners, over the last decade.

In the lawsuit with N.Y.U., Mr. Merkin’s lawyers proposed in February a plan to form an “oversight committee” that would evaluate the liquidation of several funds under his control — a process that will likely take years.

Mr. Merkin has also been sued by New York Law School and the publishing executive, Mortimer B. Zuckerman, over his losses connected to Mr. Madoff.

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