Well, that didn’t take long. Less than a week after suing Beverly Hills money manager Stanley Chais, the court-appointed trustee in the Bernard Madoff investment scandal filed a $500 million lawsuit against J. Ezra Merkin.
It’s safe to say that this lawsuit did not come as a surprise to Merkin, who quickly emerged as one of Madoff’s primary fund feeders. Here’s the story:
According to the complaint, Mr. Merkin steered more than $1 billion into Mr. Madoff’s hands since 1995 through three large private hedge funds, Ascot Partners, Ariel Fund and Gabriel Capital. The Ariel fund is not related to Ariel Investments of Chicago.
Since 2002, Mr. Merkin’s funds withdrew at least $494 million from the Madoff scheme — returns that a financially sophisticated investor like Mr. Merkin “knew or should have known” were fraudulent, the lawsuit contends.
Among the warning signs ignored by Mr. Merkin were at least 500 instances in the last 10 years when his Madoff account statements showed large blocks of stock bought or sold at prices that did not match the stock’s trading range for the day when the transactions supposedly occurred.
Under federal and state law, the trustee can sue to recover cash withdrawn under those circumstances anytime during the six years before Mr. Madoff’s arrest. Last week, a similar lawsuit was filed to recover just more than $800 million withdrawn from Madoff accounts during that period by trust funds and private accounts managed by Stanley Chais, a prominent Los Angeles philanthropist.
I followed up on the Chais complaint for this week’s Jewish Journal. (You can read all 51 pages here.) Here’s an excerpt from my story:
Robert Chew, 55, said on Monday that he hadn’t known his money was invested with Madoff until Chais called to say it was all gone, but said he didn’t suspect his money manager was complicit in the fraud. Still, Chew was angry with Chais for having, Chew believes, misled his clients.
“We never knew exactly what he was doing, but he had been doing it for 40 years and very successfully,” said Chew, who moved with his wife Sarah Mandell from Los Angeles to Colorado and entered retirement two years ago. “We thought he was the guy making the trades, and he led us to believe that. At parties we would ask ‘How’s the market?’ ‘Oh, it’s good, it’s bad, it’s getting tougher to make trades.’ He led us to believe he was the genius and his people were the geniuses behind all this. When really all he did was collect the money and move it on to someone else. And he was getting a 25 percent cut for this.”
I was unable to speak with Chais for this story. His main defense, through his attorney and when he spoke with The Journal in mid-December, has been that he and his family lost a substantial amount of money, and that surely he would have protected his cash if he had been wise to Madoff’s fraud.
Wednesday I received a one-page letter Chais sent to his investors. (You can download it here.) It reiterates that theme:
Finally, the notion that I was aware of Madoff’s Ponzi scheme is devoid of any common sense. Obviously if I knew, or even suspected, that it was all a fraud, I would not have kept my money, my family’s money, and my parters’ money with Madoff. As you know, I held a very significant amount of money in each of the partnerships, and like so many of you, I have lost virtually everything because of this mess.