NYU sues Merkin over Madoff Fraud Losses
NYU Lost $24 Million With Madoff; Sues Merkin, Funds (Update4)
By Lindsay Fortado
Dec. 24 (Bloomberg) -- New York University, the largest private university in the U.S. by number of students, lost $24 million in investments managed by Bernard Madoff, the institution said in a lawsuit filed against J. Ezra Merkin, Gabriel Capital LP fund and Ariel Fund Ltd.
Merkin’s hedge funds invested NYU’s money with Madoff without telling investors or proper due diligence, the school alleged in a complaint filed yesterday in New York state court in Manhattan. NYU had $94 million invested in Ariel, which operated as a limited partnership with Merkin and Fortis Bank, according to the lawsuit. Fortis is also named as a defendant.
The NYU claim adds to a growing list of suits by Madoff victims against feeder funds. Gabriel Capital, a $1.5 billion fund, plans to liquidate due to Madoff losses, Merkin said in a Dec. 18 investor letter. The fund lost 39 percent this year through Nov. 30, mirroring the drop in the S&P 500 Index.
“Without making disclosures in the quarterly reports to investors, and in the face of an extraordinary number of ‘red flags,’ Merkin, for years, simply turned over a substantial portion of Ariel’s funds to Madoff,” NYU alleged in the complaint. NYU alleged Merkin made all the investment and executive decisions for Ariel.
Clients of Madoff had about $36 billion with his firm, according to a Bloomberg tally that may include some double counting. Before his arrest on Dec. 11, Madoff confessed to employees that his “giant Ponzi scheme” may have cost as much as $50 billion, according to an FBI complaint. Madoff has been charged by federal prosecutors with one count of securities fraud and faces as much as 10 years in prison if convicted.
Restraining Order
New York State Supreme Court Justice Herman Cahn in Manhattan today issued a temporary restraining order barring Merkin “from taking any action to liquidate Ariel” prior to a Jan. 6 hearing before Justice Richard Lowe. Cahn is also prohibiting Merkin from taking any action to move assets of Ariel or Gabriel, according to the order.
Merkin told Ariel investors in a Dec. 18 letter it would wind down the fund in light of the losses from the Madoff fraud and “engage in an orderly disposition of its portfolio positions” over the next several years.
NYU is “very pleased” with Cahn’s order, school spokesman John Beckman said today in a statement.
Cahn’s order, which also barred the destruction of Madoff related documents, “will have no impact on the previously announced plans for Ariel Fund” to wind down, Merkin’s lawyer, Andrew Levander, said today in a statement. “It is significant that the court rejected NYU’s request to prevent Ariel Fund from selling assets as part of its wind-down process, and we expect that process to continue.”
39 Percent Loss
Merkin reported a 39 percent year-to-date loss, which amounts to about 25 percent of Ariel’s net assets, according to the lawsuit.
“It is unclear why the 25 percent loss announced by Merkin should necessitate a ‘winding down’ of the fund -- unless Merkin simply turned over all the fund’s cash to Madoff,” NYU said in the complaint. “It is clear that entrusting the management of NYU’s remaining investment to Merkin would place these assets at substantial risk of dissipation.”
Law School Suit
Merkin, the chairman of GMAC LLC, the finance arm of General Motors Corp. that is 51 percent owned by Cerberus Capital Management LLC, was also blamed by Yeshiva University for losses. The school said it lost about $110 million in investments tied to Madoff, most through Merkin’s Ascot Partners LP fund.
Merkin resigned as a school trustee and its investment chairman on Dec. 12. Madoff was also a trustee. Tufts University said last week that it lost $20 million, or less than 2 percent of its endowment, from investments through Ascot.
New York Law School sued Merkin and Ascot last week for investing in funds run by Madoff. That suit, filed in Manhattan federal court, seeks class action, or group, status on behalf of other Ascot investors. The law school allegedly had $3 million invested in Ascot.
Princeton, Columbia and Yale Universities and the University of Pennsylvania said they have no exposure to Madoff. The Dalton School, a private school on Manhattan’s Upper East Side, also had no exposure, said Robert Kasdin, the president of the board. The school received donations of $100,000 from Bernard and Ruth Madoff’s family foundation in 2004 and 2005.
Madoff Fraud
The alleged Madoff fraud has affected wealthy individuals from around the world. Liliane Bettencourt, the world’s wealthiest woman, entrusted part of her $22.9 billion fortune with Madoff through a fund manager who was found dead in New York yesterday, people familiar with the matter said.
The body of Access International Advisors co-founder Thierry Magon de La Villehuchet was found in his Madison Avenue office yesterday. Police said he probably killed himself.
Other investors including Spanish billionaire Alicia Koplowitz, U.S. moviemaker Steven Spielberg and Nobel laureate Elie Wiesel have also lost money from Madoff’s alleged scheme.
Merkin was paid a 1 percent management fee of the net asset value of Ariel and an incentive fee of 20 percent of the annual increase, according to the NYU suit.
“As Madoff reported illusory profits and converted the assets that Merkin delivered over to him, Merkin’s own compensation soared,” NYU alleged in the complaint.
NYU’s endowment was $2.16 billion as of June 30, 2007, according to the National Association of College and University Business Officers, a Washington-based organization.
The case is New York University v. Ariel Fund Ltd., 8603803/2008, New York State Supreme Court (Manhattan).
To contact the reporter on this story: Lindsay Fortado in New York State Supreme Court in Manhattan at lfortado@bloomberg.net.
Last Updated: December 24, 2008 15:34 EST
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