Madoff’s Merkin takes a dismissive attitude, Bongionro assets, and Vizcaya Woes
Ezra Merkin is back in the news. For those who don’t remember Mr. Merkin, as discussed in previous posts (A Due Diligence Quagmire: Merkin’s Day in Court and Madoff Prison Pics (Sort of) … And Ezra Merkins Fellon’s) was a former money manager who funnelled millions to Madoff via his Gabriel Capital Corporation (the Ascot, Gabriel and Ariel funds). Mr. Merkin is a Harvard Law School Graduate and the former Chairman of GMAC Financial Services. After Madoff losses ensued, and Merkin’s former clients (such as Mort Zuckerman – chairman of Boston Properties Inc. and publisher of the New York Daily News, New York Law School, individual investor Scott Berrie, Yeshiva Law School, and the Nephrology Associates PC Pension Plan) lost millions a number of lawsuits ensued including a class action lawsuit and a suit from the Madoff Trustee, Irving Picard. The most interesting of which is the case brought by Andrew Cuomo’s (New York State Attorney’s General) office. In the original complaint (link here) Cuomo had alleged (in part):
1) Merkin concealed his links to Madoff
2) Lied about where investor’s money was actually going
3) Used company’s funds for personal purchases (including approximately $91 million of artwork for his apartment at the famous 740 Park Avenue, New York, NY)
4) Collected more than $470 million in management and incentive fees
5) Was responsible for investor losses of approximately $2.4 billion
The Cuomo complaint also raised a number of operational due diligence red flags:
1) Misstatements regarding the roles of Madoff:
Merkin misstated Madoff’s role in offering memorandum for the Ascot funds. The offering memorandum suggested that Madoff was one of many prime brokers utilized when quite the opposite was in place.
In 2006, for example, approximately 98% of Ascot’s transactions were both effected and cleared by Madoff, and Madoff had custody of over 99% of Ascot’s purported securities holdings.
The role, diversity and independent oversight of third-parties is an essential element to proper operational due diligence. All of which were apparently missing in this case.
2) Lack of reporting transparency:
Ascot’s quarterly statements to investors disclosed only the value of each investor’s account and the purported appreciation during the prior quarter.
3) A smoke screen was created regarding the roles of traders:
If investors asked who carried out Ascot’s trading activity, Merkin would sometimes deceive them by explicitly indicating that he and his employees at the 450 Park Avenue office did so.
Merkin’s traders however, were involved only in managing Ariel’s and Gabriel’s assets, not Ascot’s, and Ascot’s trading was almost entirely carried out by Madoff.
4) Unclear investment strategy:
Merkin at times concealed the fact that Ascot engaged in the “split strike conversion” strategy by misrepresenting Ascot’s investment strategy as well as its management.
5) Counterparty risk:
Merkin made false and misleading statements to investors to foster the impression that Ascot’s funds were held with a sound, creditworthy broker (Morgan Stanley) when in fact the majority of assets were held with Madoff.
6) Misstatements about the role of BDO (the Ascot fund’s auditor):
The complaint alleges that Merkin told an investor that he required Ascot’s auditor, BDO Seidman LP, to visit Madoff’s offices two or three times a year to perform standard operational due diligence. This representation was false. BDO did not perform standard operational due diligence, or any other kind of examination, on Madoff’s operation, and Merkin had no reason to believe otherwise.
Now we come to the next part of this story. It was reported earlier this week that Merkin has moved to dismiss the complaint because the plaintiff investors cannot show that he and his Gabriel Capital Corp investment advisory affiliate “knew about, much less participated in, the Madoff fraud.” This isn’t the first time Merkin’s lawyer have attempted to have the complaint dismissed, here is an article about how virtually the same tactic was attempted in February 2010. Litigants including New York University objected to that dismissal (link here) and that previous dismissal attempt failed. Here is a video about the first dismissal attempt from CNBC:
Furthermore, rejecting the contention that he should have performed better due diligence, Merkin said he had no motive to commit fraud, and himself lost more than $100 million with Madoff.
The following usual responses followed:
- “It’s a desperate effort by Merkin and others to dismiss a well-pleaded complaint that demonstrates their abject malfeasance,” said Gregory Nespole, a lawyer for the pension plan in the class action lawsuit, about the Merkin filing.
- Karin Fisch, a lawyer for the New York Law school, and individual Scott Berrie. Neil Steiner, a lawyer for Merkin, also declined to comment.
BDO USA LLP and affiliates, which audited the Merkin funds, on Friday also asked for dismissal of the lawsuit.
Although all the key parties have likely submitted their claims in this case, a Manhattan judge has recently ruled that creditors who wish to assert claims against two hedge funds formerly run by financier J. Ezra Merkin have until next month to submit claims to the funds’ court-appointed receiver. Here’s the ruling. Looks like the clock is running on Mr. Merkin….
In other Madoff news, the Madoff Trustee, Irving Picard, won a $180 million default judgment against Vizcaya Partners Ltd. Vizcaya missed a deadline to respond to the lawsuit, which seeks to recover money the hedge fund withdrew from its Madoff account less than four months before the Madoff’s December 2008 arrest. The default judgment applies to Vizcaya and affiliates Zeus Partners Ltd., Bermuda-based Siam Capital Management and the Cayman Islands-based Asphalia Fund Ltd.
It is also being reported that Madoff’s former secretary, Annette Bongiorno, is under pressure to give up over $2.5 million in assets including $1.4 million Manhassett, NY home, $1.1 million in bank accounts, an $862,000 Boca Raton, Fla., condo, and three cars worth a combined $340,000. Here is a video about Ms. Bongiorno’s recent interaction with the U.S. Attorney:
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