Court documents refer to the victim as “Investor Q.”
Q had invested heavily in funds run by convicted Ponzi artist Bernie Madoff. But long before Madoff’s scheme unraveled, Q had an epiphany that can be summed up with just one verb: “diversify.”
Unfortunately, Q discussed this idea with J. Ezra Merkin of Gabriel Capital, which managed several hedge funds, including the Ariel Fund and the Ascot Fund Limited.
Q had no reason to suspect that Merkin would put his money back into the very funds he wanted to exit as part of his diversification strategy. On Dec. 22, 10 days after Madoff’s arrest, Q wrote Merkin this e-mail:
“Dear Ezra . . . As a long time holder in Madoff ($3.9M), plus our children ($2.5M), we never, ever would have invested in Gabriel had we been properly advised of the Madoff investment. The last thing we expected was to add to our present Madoff holdings. I certainly should have been advised from the beginning of our investments and also in subsequent reports. In addition, we paid a charge of 1.5 percent, which we never paid at Madoff.”
Q’s e-mail is among the many exhibits in the civil fraud lawsuit that New York Attorney General Andrew Cuomo filed April 6.
“J. Ezra Merkin betrayed hundreds of investors who entrusted him with their savings by recklessly feeding their funds into the largest Ponzi scheme in history, while falsely claiming he actively managed their funds,” Cuomo’s suit alleges.
Merkin collected more than $470 million in fees over nearly two decades, just for sticking his clients with about $2.4 billion in Madoff losses, the suit alleges. He made as much as 20 percent in incentive fees on fictitious profits Madoff produced in his fund, according to the suit.
Merkin faces similar claims in lawsuits from clients, including New York University and Mortimer Zuckerman, chairman of Boston Properties Inc. and owner of the New York Daily News.
Merkin’s attorney, Andrew Levander, has said his client was the victim of “the intricate, fraudulent scheme perpetrated by Madoff.”
“We are disappointed that the Attorney General . . . has filed this hasty and ill-conceived civil lawsuit, against which we intend to defend vigorously,” he said in a prepared statement after the suit was filed. “Investors in all of the funds expressly authorized Mr. Merkin to allocate assets to third- party managers such as Madoff, without giving them notice or obtaining their consent.”
Cuomo maintains Merkin didn’t tell clients he was handing their money to Madoff.
On Jan. 7, another investor who lost money with Merkin proffered a theory about him that every investor ought to consider before dumping millions into a hedge fund:
“You were nothing more than a glorified mailbox.”
Al Lewis: 201-938-5266 or al.lewis@dowjones.com. Read Al’s blog at .
