J. Ezra Merkin, an art collector and hedge fund manager, has been charged with fraud by New York State Attorney General Andrew Cuomo. According to Mr Cuomo, Mr Merkin concealed from his clients that he had secretly placed over $2.4bn with the self-confessed criminal money manager Bernard Madoff. Mr Merkin took handsome fees from the arrangement at the expense of a number of non-profits, and bought hugely expensive art using funds from one of his companies, the Attorney General alleges.
In a complaint filed on 6 April, Mr Cuomo alleges that Mr Merkin secretly steered the money of investors, including prominent charities, to Madoff, taking $470m in management and incentive fees. Mr Merkin used monies from his management company, Gabriel Capital Corporation, to make personal purchases including “over $91m of artwork for his apartment”, Mr Cuomo charges. Mr Merkin is known as a leading collector of Rothko.
Alleging securities and business fraud, breach of fiduciary duties, and other illegalities, the Attorney General is seeking payment of damages, the disgorgement (return) of fees and other financial penalties.
Many investors placed funds with Mr Merkin because they knew him personally, including through non-profit organisations he was involved with. When a representative of a non-profit visiting his Park Avenue offices in 2006 asked who did the trading for his hedge fund Ascot, Mr Merkin pointed to employees beyond a glass partition saying “it’s all done by them”, but actually, all Ascot’s assets were under Madoff’s control, the complaint says.
At a meeting of a non-profit’s finance committee in 2006, Mr Merkin’s “full panoply of lies and misrepresentations” were on display, the complaint says, with references to a “team”, “short-term pricing discrepancies in the options market”, “computer-driven models”, and “leaps” (long-term equity options)”, together with the downplaying of Madoff’s role and the exaggeration of Mr Merkin’s family funds invested in Ascot. When non-profit investors became concerned after Bear Stearns and Lehman Brothers fell, Mr Merkin told one non-profit that Morgan Stanley held Ascot’s assets; he told another that he was raising Ascot’s fees to buy $20m in computers for Ascot’s Leap investments, which never happened. A Merkin employee told another non-profit that Ascot had multiple brokerage relationships, but all the statements were false; all Ascot assets were under Madoff’s control, according to Mr Cuomo.
Leaving aside the allegation that it was Madoff, not Mr Merkin, who was managing the money, Mr Merkin’s alleged descriptions of what his funds would do, contained in offering memoranda for investors, raise questions about the degree of risk-taking that non-profits apparently believe they may prudently engage in. The memoranda allegedly promised that Ascot would invest in “distressed debt and businesses undergoing reorganisation”, “debt claims and the securities of companies that have filed for bankruptcy”, and forward or futures trading.
Although he knew of red flags related to Madoff investments, Mr Merkin kept $2.4bn invested with Madoff, the complaint says.
Originally appeared in The Art Newspaper as 'Madoff associate in court'