J. Ezra Merkin disclosed that his Ariel Fund Ltd. and Gabriel Capital LP each plunged more than 40 percent during the fourth quarter, primarily on losses tied to Bernard Madoff and private-equity securities.

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Merkin Reports Two Funds Lost More Than 40% on Madoff (Update1)

By Miles Weiss and Josh Fineman

Feb. 13 (Bloomberg) -- J. Ezra Merkin disclosed that his Ariel Fund Ltd. and Gabriel Capital LP each plunged more than 40 percent during the fourth quarter, primarily on losses tied to Bernard Madoff and private-equity securities.

Merkin told shareholders in December that he would wind down Ariel and Gabriel and sell off their holdings after funds run by his New York-based Gabriel Capital Corp. suffered losses from Madoff’s alleged $50 billion Ponzi scheme. In letters sent this month, Merkin told Ariel and Gabriel clients that most of the “significant” distributions to them won’t occur until “next year and beyond.”

“We are all stunned and shaken by the financial losses we have incurred as a result of Madoff’s massive fraud,” Merkin said in a Feb. 9 letter to Ariel shareholders, which an investor provided to Bloomberg News. “We are also unhappy about the non- Madoff losses.”

Merkin, the former chairman of auto lender GMAC LLC, invested billions of dollars of client funds with Madoff, who claimed to produce annual returns of 10 percent or more whether markets rose or fell. New York University, which had $94 million invested in Ariel, filed a suit against Merkin in December that claimed $24 million in Madoff-related losses.

Andrew Merrill, a Merkin spokesman, declined immediate comment. Andrew Levander, an attorney at Dechert LLP in New York who has been representing Merkin, didn’t immediately return a telephone call seeking comment.

Partial Settlement

Madoff, 70, was arrested Dec. 11 at his Manhattan home after allegedly confessing to his sons that his investment advisory business was a “giant Ponzi scheme” that may have cost investors $50 billion, according to an FBI complaint. On Feb. 9, he reached a partial settlement with the U.S. Securities and Exchange Commission promising not to contest claims his New York- based investment advisory firm was a fraud.

Ira Sorkin, Madoff’s attorney, didn’t immediately return a telephone call.

Ariel declined a net 43.8 percent last year, including a 41.2 percent drop in the fourth quarter, according to the Feb. 9 letter. The U.S. benchmark Standard & Poor’s 500 Index fell almost 37 percent when dividends are included.

The Ariel results are net of expenses and 2008 management fees, which have been calculated but remain unpaid.

Last year’s losses on the Madoff account equaled about 24.1 percent of Ariel’s 2008 contributed capital, the letter said. The figure assumes no recovery on investments with Madoff.

Writedowns

In addition, Ariel wrote down its portfolio of private equity securities by 13.2 percent for the year. It also had losses of 0.6 percent to 2.1 percent on high-yield bonds, mortgage-backed securities and merger-related bets.

The Gabriel fund dropped 44 percent in the fourth quarter and 46 percent for the year, according to a separate letter dated Feb. 6. Last year’s losses on the Madoff account equaled about 24.2 percent of Gabriel’s 2008 contributed capital.

In addition to the Madoff losses, Gabriel wrote down its portfolio of private equity securities by 14.7 percent for the year. It also had losses of 2.4 percent on high-yield and distressed debt, 1.8 percent on mortgage-backed securities, and 0.6 percent on arbitrage-related equities.

Merkin said that his focus is now on winding down the Ariel and Gabriel funds. Gabriel Capital, the management company, plans to put together an independent committee of investors, including Ariel and Gabriel shareholders, to oversee the liquidation process, according to the letters.

Investor Questions

Many of his investors have asked about the timetable for receiving distributions as the funds’ assets are sold off, Merkin said in the letters. He reiterated that the process will take years to complete, given that there isn’t an active market for many of Ariel’s holdings.

“A forced sale of those assets -- at any time, let alone now, when markets are depressed -- would not yield the values we believe inherent in the positions,” Merkin said in the letter. “Our mandate is to realize assets prudently and intelligently.”

Merkin said Ariel and Gabriel may make small initial payments to shareholders by the end of June. Most of the significant asset sales, and thus distributions to investors, won’t occur until at least next year, the letters said.

“While I am distressed by the anger that some of you have directed toward me, I understand that the financial losses that you have suffered as my investors have fed a sense of deep disappointment,” Merkin said in each letter. “I hope that the passage of time and a successful wind-down effort will assuage those feelings.”

To contact the reporters on this story: Miles Weiss in Washington at mweiss@bloomberg.netJosh Fineman in New York at jfineman@bloomberg.net