George S. May Business Blog

Ezra Merkin is next on Cuomo’s to-do list

Another Madoff feeder fund has become under fire. NY Attorney General Andrew Cuomo filed a 55 page civil fraud complaint against former head of GMAC and longtime friend of Bernard Madoff, J. Ezra Merkin. The suit, in summary, claims that Ezra Merkin funneled over $2.4 billion in outside clients funds into Madoff’s massive Ponzi scheme. Allegedly, Ezra Merkin ignored “glaring red flags” (such as Madoff’s one man “auditing firm” he used) and Cuomo estimates that Merkin collected in the neighborhood of $470 million in management and incentive fees over time. 

The suit continues that Merkin had blatant conflicts of interest, serving on the boards of charities and then using that leverage to attract investments from the charities, which were then funneled to Bernie Madoff. 

“Merkin duped individual investors, non-profits, and charities into believing he was responsibly managing their investments, when in actuality he was dumping them into history’s largest Ponzi scheme,” Cuomo said.

As Cuomo continues on the hunt, the main question that will be paid most attention to will clearly be: who actually knew about this whole scheme, other than Madoff? But, while Cuomo may be able to point out “red flags” it is going to be tough to prove that people like Merkin knew of the scheme in its entirety. Cuomo has revealed, however, that they found two early negative newspaper articles, questioning Madoff’s practices, right in Merkin’s files. Still, because of the length of time that this Ponzi scheme went on, without setting off major alarms on behalf of the S.E.C., anyone being prosecuted will likely take the defense of:

 Well, if the S.E.C. couldn’t catch on for all these years is it not an obvious possibility that I could have been fooled as well.

So far, in the case of Ezra Merkin, that seems to be his exact strategy. Andrew Levander, Merkin’s attorney, says that Merkin had performed “extensive due diligence” on Madoff. ”Unfortunately, Mr. Merkin’s due diligence, just like the detailed investigations performed by countless others, including regulators, was thwarted by the intricate, fraudulent scheme perpetrated by Madoff.” Andrew Levander maintained that his client would “vigorously defend” against Cuomo’s suit, calling it “hasty and ill-conceived.”

Merkin, 55, is already facing suits from other clients, including New York University and Mort Zuckerman, publisher of the New York Daily News.

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