A Window Into How Madoff Succeeded
The action brought by New York Attorney General Andrew Cuomo against J. Ezra Merkin and Gabriel Capital Corporation provides a window into how Bernard Madoff created and operated the largest Ponzi scheme in history. The People of the State of New York v. Merkin, S.Ct. NY, Filed April 6, 2009. The formula is straight forward: Those who assist ignore red flags and earn lots of money for little to no work.
According to the complaint, Mr. Merkin and his investment funds were “feeder funds” which provided the Madoff scheme with millions of dollars of investor money. Ezra Merkin is the general partner of Gabriel Capital Corporation and Ariel Fund Limited. He was known as a “pillar of the New York philanthropic community,” who, after a few years in private law practice, began working on Wall Street, creating domestic fund Ariel Capital L.P which later became Gabriel and its offshore twin Ariel Fund Limited.
Mr. Merkin used his extensive network of connections in the community and in the philanthropic world to lure investors to his funds. According to the complaint, in 1992 he formed Ascot Partners and Ascot Fund Ltd. as “feeder” funds that entrusted Bernard Madoff with virtually all of their assets. Mr. Merkin held himself out as an investment guru and told investors that it was his investment strategy at work for them. In fact, he did little work other than routine paper shuffling while collecting significant investment management fees.
Mr. Merkin also marketed Gabriel Capital and Ariel Fund Limited, formed in 1988, to investors. He told investors these funds were vehicles for investing in distressed debt and bankruptcy related securities. Beginning in 2000 however, Mr. Merkin gave a significant portion of the assets of these funds to Mr. Madoff, despite the fact that the claimed investment strategy of the Madoff fund had noting to do with the objectives of Gabriel and Ariel. Mr. Merkin failed to disclose this fact to investors, even when they specifically informed him that they did not want their money invested with Bernard Madoff.
Overall, those who invested with Mr. Merkin, including charities and non-profits, lost approximately $2.4 billion, according to the complaint. During the period, Mr. Merkin ignored warnings and other red flags indicating that the Madoff funds might be a fraud. Being oblivious paid off: he earned more than $470 million in management and incentive fees.
The Attorney General’s complaint seeks, among other things, an accounting of all fees and compensation and restitution and damages.