Three hedge funds run by New York financier and philanthropist Ezra Merkin won dismissal of civil lawsuits accusing them of being part of swindler Bernard Madoff's massive fraud.
In an order dated Friday and made public on Monday, U.S. District Judge Deborah Batts in Manhattan threw out 2008 lawsuits alleging fraud and misrepresentation by the Ascot Fund, the Gabriel Fund and the Ariel Fund. Another defendant was BDO Seidman LLP, the auditor of the Ascot Fund.
No misrepresentation was made when defendants relied on Madoff, as a third-party manager, to follow the investment strategies that aligned with the stated investment strategies of the funds, the judge's order said.
Batts also said allegations that the funds should have recognized red flags alerting them to Madoff's fraud are unavailing given the opposing considerations of Madoff's immense reputation and deep deception.
Madoff, 73, was arrested in December 2008 and pleaded guilty in March 2009 to running a multibillion-dollar fraud over decades. He is serving a 150-year prison term.
In the wake of the Madoff scandal, Merkin, a money manager, philanthropist and art collector, resigned as nonexecutive chairman of GMAC LLC, the financing unit of General Motors. GMAC is now Ally Financial.
The plaintiffs in the lawsuit included New York Law School, a pension fund and two other investors. They invested a total of $18 million in Merkin's hedge funds, money that was in turn invested in Madoff's firm.
Lawyers for the plaintiffs could not immediately be reached to comment on the ruling.
Merkin's lawyer, Andrew Levander, said his client did not deceive the sophisticated investors in his hedge funds and that the judge agreed. In fact, investors overwhelmingly knew that Mr. Merkin worked with third-party managers and that substantially all of Ascot's assets were invested with Madoff, Levander said in a statement.
Madoff ran a classic Ponzi scheme: When investors needed to be paid, he used money deposited by other investors, including so-called feeder funds such as those run by Merkin.
Sometime in the early 1990s, Merkin met Madoff and raised money to invest in Bernard L. Madoff Investment & Securities LLC. By the time the fraud was revealed, Merkin and Gabriel Capital Corp had entrusted almost all of the Ascot Fund with Madoff and at least 25 percent of the investment capital of the Gabriel Fund and the Ariel Fund, according to court documents.
Judge Batts, in her order, rejected allegations that Merkin improperly delegated investment authority to Madoff and did not conduct proper due diligence.
She wrote that Madoff cleverly leveraged his considerable reputation in order to perpetrate his massive fraud, for many years, without detection by some of the most sophisticated entities in the financial world: the SEC, Wall Street banks, and the like.
Batts said that in line with what other courts have done, she would not recognize a securities fraud claim against those who did business with Madoff simply by imputing the suspicions of a few (albeit, wise) people who suspected Madoff's fraud before it was ever discovered.
Merkin had been general partner of Ascot and Gabriel. He was the sole shareholder and director of Gabriel Capital Corporation, which in turn was the investment adviser to the Ariel Fund.
The case is In re: J. Ezra Merkin and BDO Seidman Securities Litigation, U.S. District Court for the Southern District of New York, No. 08-10922.
(Reporting by Grant McCool; editing by John Wallace and Matthew Lewis)