Scott+Scott Obtains Restraining Order in Action Over Madoff Losses

Source: Bloomberg | Authors: Patricia Hurtado and Lindsay Fortado

Scott+Scott LLP’s New York-based partner Beth Kaswan and her team of Scott+Scott litigators won a critical court order yesterday on behalf of the firm’s client New York University, the largest private university in the United States. NYU has sued J. Ezra Merkin and his Gabriel Capital LP hedge fund and Ariel Fund Ltd. over investments made with Bernard Madoff using NYU’s endowment.   New York State Court Justice Robert Lowe III continued a temporary restraining order requested by Scott+Scott on NYU’s behalf, which prohibits Merkin, Gabriel Capital and Ariel from transferring NYU’s investment funds or liquidating their own assets.  Judge Lowe also agreed to allow Scott+Scott to depose Merkin as soon as possible.

The complaint claims that Merkin’s hedge fund simply handed tens of millions of dollars of the university’s endowment to Madoff for management without performing any due diligence, auditing or monitoring of the money invested.   As a result, NYU has lost over $24 million.  It has been widely reported that the Ponzi scheme crafted by Madoff could ultimately cost investors $50 billion.

Ms. Kaswan and her team’s victory has also received extensive media coverage, including the  Bloomberg business article reprinted below and a news piece featured on CNBC.

NYU Wins Extension Against Merkin Over Madoff Losses

By Patricia Hurtado and Lindsay Fortado Jan. 6 (Bloomberg) — New York University won a court order extending a temporary ban preventing J. Ezra Merkin from transferring millions of dollars of the university’s funds related to investments with Bernard Madoff.

New York State Supreme Court Justice Richard Lowe in Manhattan today extended an order restraining Merkin, along with his Gabriel Capital LP fund and Ariel Fund Ltd., from withdrawing, liquidating or dissolving assets. Lowe also set a Feb. 17 hearing to consider a preliminary injunction on the ban.

NYU, the largest private university in the U.S. by enrollment, said in a complaint filed Dec. 23 that it had at least $24 million in losses after Merkin and his funds invested its money with Bernard L. Madoff Investment Securities LLC without telling the university. Merkin, who has denied wrongdoing, may be deposed in the case, Lowe ruled.

Merkin “engaged in purposeful deceit” by investing university funds with Madoff without its authorization, Beth Kaswan, a lawyer for NYU, told Lowe in court. She said university officials told Merkin in October not to put NYU’s money in any Madoff funds.

Madoff, 70, was charged last month with allegedly directing a $50 billion Ponzi scheme out of his New York-based investment firm. He remains free on $10 million bail while under house arrest and electronic surveillance. He was charged with one count of securities fraud and faces as long as 20 years in prison if convicted.

‘Grossly Negligent’

The university may lose its entire investment of $94 million with Merkin, Kaswan said. Merkin told investors in Dec. 18 letters that Gabriel Capital, a $1.5 billion hedge fund, and Ariel would both liquidate after incurring losses on investments with Madoff.

“You have a pattern of grossly negligent conduct by Mr. Merkin,” Kaswan told Lowe. “If it continues,” she said, “NYU won’t see a dollar of that investment.”

Merkin’s lawyer, Andrew Levander, said after the hearing that NYU’s allegations about Merkin are “categorically denied.”

Levander told Lowe that his client was under no obligation to inform NYU about how the investments were handled. He argued the school profited from its investment with Merkin.

‘In Good Faith’

“Mr. Merkin has always acted in good faith and did not deceive NYU or any other investors,” Levander said in a statement after the hearing today. “As is common in hedge fund documents,” the prospectus for Ariel expressly stated that investment decisions on part of all of the funds could be delegated to money managers, such as Madoff, he said.

Merkin will forego collecting a fee for his work winding down Ariel, which could take several years, Levander said.

The temporary restraining order sought by NYU wasn’t warranted because it wasn’t “in exceptional circumstances,” Levander told Lowe. “Every hedge fund and every mutual fund in America has had exceptional losses,” he said.

Lowe ordered that Merkin be questioned under oath as well as a yet-unidentified NYU official. At the Feb. 17 hearing to consider NYU’s request for a preliminary injunction, Lowe also will hear arguments on whether to appoint a receiver to liquidate Merkin’s funds.

Scandal ‘Victim’

“The Madoff scandal is a tragedy of epic proportions,” Levander told Lowe. “My client is a victim of that scandal and lost tens and tens of millions of dollars.”

Asked if Merkin could face criminal charges stemming from the government’s investigation of Madoff, Levander said, “Absolutely not.”

Maurice Maertens, NYU’s chief investment officer, said in court papers that NYU received a letter Dec. 12 announcing for the first time that Gabriel had invested a portion of the university’s funds with Madoff and that those funds were lost. NYU sued Merkin and the funds on Dec. 23 in New York State Supreme Court in Manhattan.

“Until Dec. 12, 2008, we had no knowledge that NYU’s funds were instead being managed by Bernard Madoff,” Maertens said in court papers filed for today’s hearing.

Maertens said in court papers that NYU first invested with Ariel in December 1993. After that investment of $20 million in endowment funds, it invested $10 million more in 1997. He said Merkin met with university officials in October and suggested NYU invest with Madoff. Maertens said the university refused to authorize such an investment.

NYU Investments

Merkin never mentioned, at that point, that the university’s money was already invested with Madoff, Kaswan told Lowe. That “suggests that there is something far worse than negligence going on in these proceedings,” she said.

The university objects to Merkin’s claim that he can continue to seek payment for “expenses” related to managing the fund.

“It would be outrageous for him to take any further monies from the fund,” Maertens said in an affidavit filed with the court.

Justice Herman Cahn issued a temporary restraining order Dec. 24 barring Merkin “from taking any action to liquidate Ariel” prior to today’s hearing before Lowe. Cahn also prohibited Merkin from taking any action to move assets of Ariel or Gabriel or to destroy any Madoff-related documents.

Levander said today after court that Lowe’s order allows Merkin to pay “ordinary business expenses” and continue winding down the Ariel fund.

‘Red Flags’

“Without making disclosures in the quarterly reports to investors, and in the face of an extraordinary number of ‘red flags,’ Merkin, for years, simply turned over a substantial portion of Ariel’s funds to Madoff for management,” NYU said in its complaint.

Ariel operated as a limited partnership with Merkin and Fortis Bank, according to NYU’s lawsuit. Fortis is also named as a defendant.

Madoff’s clients had invested about $36 billion with his firm, according to a Bloomberg tally that may include some double counting. Before his arrest on Dec. 11, Madoff confessed to employees that his “giant Ponzi scheme” may have cost as much as $50 billion, according to an FBI complaint.

Merkin is chairman of GMAC LLC, the finance arm of General Motors Corp. that is 51 percent owned by Cerberus Capital Management LLC.

The case is New York University v. Ariel Fund Ltd., 603803/2008, New York State Supreme Court (Manhattan).

Please contact Scott+Scott at or call (800) 404-7770 or (860) 537-5537, if you would like further information about this lawsuit.

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