The Bernard Madoff trustee has filed a lawsuit against Ezra Merkin, one of several so-called middlemen who recruited investors for Madoff’s funds. Those funds turned out to be a huge Ponzi scheme that bilked Madoff’s clients out of billions of dollars.

Merkin told investors that he personally managed three hedge funds – Ascot Partners, Ariel Fund and Gabriel Capital. But according to charges filed against Merkin by the New York Attorney General last month, Merkin turned virtually all of this money over to third-party money managers, including Madoff. According to the complaint, Merkin typically did not disclose to investors, or actively obscured from them, that Madoff was actually managing some or all of the funds they invested.

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 Attorney General’s complaint claimed.

The New York Attorney General also claims 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.

Now Madoff trustee Irving Picard is also charging that Merkin knew Madoff was running a scam. According to Picard’s lawsuit, Merkin withdrew more than $500 million in “nonexistent principal” from Bernard L. Madoff Investment Securities in the years before Madoff confessed his scam last December.

The lawsuit also claims that Merkin “‘earned’ tens of millions of dollars in management and performance fees, even though he knew or should have known that (the firm) was engaged in fraud.”

Picard’s lawsuit seeks return of the money Merkin withdrew from Madoff’s fund. If recovered, the money would be used to repay Madoff’s investors some of the what they lost to his scam.

Picard has been charged with locating and liquidating Madoff’s assets in a bid to recover funds for defrauded investors. So far, he has located just over $1 billion – only a fraction of what Madoff’s clients lost to his scheme. Experts have said previously that victims of frauds like the Madoff Ponzi scheme usually only recover pennies on the dollar.

This entry was posted on Friday, May 8th, 2009 at 9:42 am and is filed under Stock Fraud.