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The New York state attorney general has filed a civil suit in state court charging money manager and philanthropist J. Ezra Merkin with fraud and breach of fiduciary duty based on New York State law. The complaint alleges that Merkin fraudulently invested approximately $2.4 billion with convicted fraudster Bernard Madoff and fraudulently derived management fees of $470 million from the investment.
The complaint alleges that Merkin fed monies from his family of Ascot funds and his Gabriel and Ariel funds to Madoff's Ponzi scheme. Three separate funds comprise the Ascot funds, which Merkin began in 1992. The complaint alleges that Merkin represented to his clients that he served as the money manager for the Ascot funds. However, in reality, the complaint charges that Merkin merely passed the monies to Madoff and that Merkin failed to exercise management control, ceding all such control to Madoff. The Gabriel and Ariel funds purportedly invested in distressed assets. However, the complaint alleges that beginning in 2000, Merkin turned 1/3 of the monies in these funds over to Madoff for investment. Notwithstanding the fact that Madoff's investment "strategy" was a Ponzi scheme, Madoff's publicly stated strategy was never to invest in distressed property.
According to the complaint, charities and non-profit organizations suffered particular harm at the hands of Merkin. He allegedly used his position on boards of such organizations to influence the investment of monies in the funds that he purportedly managed.
The theory of the state's action is that Merkin committed fraud and breached his fiduciary duty to investors by failing to advise such investors that Madoff was the real manager of the Ascot funds and a significant portion of the monies invested in the Gabriel and Ariel funds.
Merkin does not face possible incarceration based on this action because it is a civil rather than criminal suit. He faces the possibility of an injunction and significant monetary penalties.
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