Search for deep pockets defendants in Madoff scam underway

Reuters:

Hedge fund executive Ezra Merkin has been sued again for entrusting investments with confessed swindler Bernard Madoff, this time by New York University, which said it lost about $24 million.

The lawsuit in New York State Supreme Court is among a series against Merkin and other funds during the past week as investors seek to recover losses from the purported $50 billion Madoff scandal that would be Wall Street's biggest fraud.

A judge issued a temporary order on Wednesday, barring Merkin from liquidating Ariel Fund Ltd, named in the lawsuit by New York University, which calls itself the largest private university in the United States.

The order, which expires on January 6, will have no impact on plans announced December 18 to wind down the Ariel fund, Merkin's attorney Andrew Levander said in a statement. He said the investment manager would not receive fees and attorneys had promised to preserve documents.

"Mr. Merkin remains committed to obtaining for shareholders the best results possible in the wake of the terrible fraud committed by Bernard Madoff," the statement said.

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Investors can also make claims for money lost with Madoff through the Securities Investor Protection Corp (SIPC), which is overseeing the liquidation of Bernard L. Madoff Investment Securities LLC via a court-appointed trustee.

A U.S. bankruptcy court judge on Tuesday authorized the nonprofit group, created by Congress in 1970, to mail claim forms to customers in the first week of January. Customers have six months to return the forms.

"They will return those claim forms to the trustee with data indicating what they believe they were owed, how much they put in, how much they withdrew," said Stephen Harbeck, SIPC president and chief executive. "Since the records in this case are unreliable, the more information people can get us the faster we will be able to satisfy the claim."

Harbeck expects it will take several years to sort through investor losses in the Madoff scandal.

Merkin, who is chairman of GMAC LLC, is named in the lawsuit brought by NYU, along with his Gabriel Capital LP fund and Ariel Fund Ltd. GMAC is the finance business owned by General Motors Corp and private equity firm Cerberus Capital Management LP.

"The Funds 'feeding' money to Madoff, including Ariel, made a conscious effort to conceal Madoff's involvement from their own investors," the NYU lawsuit said. "This concealment was a requirement dictated by Madoff, which was agreed to by Merkin and other 'feeder' funds."

Merkin was sued last week in U.S. District Court in Manhattan for his management of Ascot Partners LLP, a fund he founded that lost an estimated $1.8 billion with Madoff.

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It is not clear to me why there would be some requirement not to disclose Madoff's involvement to the so called "feeder funds." I think disclosure would have been required even when Madoff was still believed to be legitimate. It is just not clear to me why someone would think that would not be material to someone's investment decision.

Generally, in a securities transaction, any link in the chain leading to the sale can be held responsible for the transaction. These parties are required to do "due diligence" to confirm the accuracy of the information provided the investor. This can take various forms and the "due diligence" required varies from significant in an initial public offering to minimal in securities traded on a recognized exchange. Brokers are entitled to rely on audited financial statements and not look behind them. They can rely on certain opinions of counsel.

The Madoff transactions appear to be between extremes on the due diligence required. It appears that Madoff would have attempted to thwart a genuine due diligence effort, but that would have been a tip off of a problem. It would have been a red flag telling the prudent not to invest.

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