US: Trustee Sues Madoff Hedge Fund Investor

The trustee gathering assets for the victims of Bernard L. Madoff's fraud has sued a prominent New York City hedge fund investor, J. Ezra Merkin, to recover almost $500 million withdrawn from Madoff accounts in the last six years.

The
case was filed on Thursday in federal court in Manhattan by the
trustee, Irving H. Picard, who is liquidating Mr. Madoff's brokerage
firm and conducting a global search for assets to repay swindled
investors.

According to the complaint,
Mr. Merkin steered more than $1 billion into Mr. Madoff's hands since
1995 through three large private hedge funds, Ascot Partners, Ariel
Fund and Gabriel Capital. The Ariel fund is not related to Ariel
Investments of Chicago.

Since 2002, Mr. Merkin's funds
withdrew at least $494 million from the Madoff scheme - returns that a
financially sophisticated investor like Mr. Merkin "knew or should have
known" were fraudulent, the lawsuit contends.

Among the warning
signs ignored by Mr. Merkin were at least 500 instances in the last 10
years when his Madoff account statements showed large blocks of stock
bought or sold at prices that did not match the stock's trading range
for the day when the transactions supposedly occurred.

Under
federal and state law, the trustee can sue to recover cash withdrawn
under those circumstances anytime during the six years before Mr.
Madoff's arrest. Last week, a similar lawsuit was filed
to recover just more than $800 million withdrawn from Madoff accounts
during that period by trust funds and private accounts managed by
Stanley Chais, a prominent Los Angeles philanthropist.

Andrew
J. Levander, a lawyer for Mr. Merkin, said that the three Merkin hedge
funds lost more in the fraud scheme than they withdrew and that the
lawsuit did not back up its contention that Mr. Merkin should have
detected Mr. Madoff's fraud.

"The trustee's unprecedented
theory of liability has no legal basis," Mr. Levander said. "We intend
to defend the lawsuit vigorously."

Mr. Merkin was the son of a notable Jewish philanthropist and religious leader in Manhattan. Most recently, he had served as chairman of GMAC and a board member at Yeshiva University, positions he resigned after Mr. Madoff's arrest.

While
not one of Wall Street's prominent names, he attracted a broad enough
following to set up a family of hedge funds, which in turn paid him
more than $470 million in management fees.

Mr. Merkin was also the target of a civil action filed last month by Andrew M. Cuomo, the New York state attorney general.

• 186 Financial Services, Insurance and Banking
• 208 Regulation