Hedge fund manager Ezra Merkin now faces civil fraud changes over the Bernard Madoff Ponzi scheme. According to a complaint filed by New York Attorney General Andrew Cuomo, investors, including several prominent charities and non-profits, entrusted millions to Merkin, who allegedly steered the money to Madoff without their permission, in exchange for $470 million in management and incentive fees.

Madoff pleaded guilty to 11 fraud counts on March 12. The former chairman of the Nasdaq stock exchange ran an investment advisory business for decades that was, in reality, a Ponzi scheme. Last November, Madoff told his investors that his fund held more than $64 billion, but in reality, he only had a fraction of that amount.

Merkin is one of several so-called ‘Madoff middlemen” who have been under scrutiny since his fraud was discovered. According to The Wall Street Journal, Merkin’s sales pitches for his three funds – Ascot Partners LP with Ascot Fund Ltd., Gabriel Capital Corp. and Ariel Fund Ltd. – included promises that he actively managed the money.

But according to the Attorney General’s complaint, Merkin turned virtually all of this money over to third-party money managers, including Madoff. Though acting primarily as a marketer and a middleman, Merkin pocketed hundreds of millions of dollars in management and incentive fees from his investors, the complaint says.

Cuomo’s complaint charges that Merkin kept a total of $2.4 billion of investors’ funds in Madoff even though he knew of irregularities and other glaring red-flags related to Madoff’s investments. According to the complaint at least two of Merkin’s most trusted colleagues repeatedly told him that Madoff’s returns were too good to be true— one warning that it could be a Ponzi scheme.

According to the Attorney General’s office, charities and non-profit organizations were particularly susceptible to and victimized by Merkin’s deceptive tactics. Over 10 percent of the assets managed by Merkin belonged to non-profit organizations. Merkin collected his customary fees from nonprofits that invested with him, but typically did not disclose, or actively obscured, that Madoff was actually managing some or all of the funds they invested, the complaint alleges.

This entry was posted on Monday, April 6th, 2009 at 10:05 am and is filed under Stock Fraud.