Andrew Cuomo, who sat back in the weeds while Massachusetts assembled a civil fraud case against Madoff feeder funds, has now charged Ezra Merkin and his feeder fund, Ascot, with the same claim. Connecticut’s courageous Attorney General, Dick Blumenthal, now has a pretty good feel for which way the wind’s blowing and we can expect him to join in the fray any month now – probably after his betters get past the initial court hurdles. But he’ll be there at the end to claim credit, in front of the cameras, I promise you.
The Ascot fund was formed by Mr. Merkin in 1992 exclusively as “feeder” fund for Mr. Madoff, says the Attorney General. It grew to hold $1.7 billion from 300 investors by the end of December, 2008. Mr. Madoff then used the money in a massive Ponzi scheme.
About 85% of the investors in the Ascot fund did not know their money was siphoned to Mr. Madoff, the complaint says. For those that knew, the truth about the size and scope of the investment was obfuscated, says Mr. Cuomo. Mr. Merkin collected an annual fee from Ascot’s investors amounting to 1% to 1.5% of the total assets in the fund – a fee that included the fictitious Madoff returns, says the complaint. By 2008, Mr. Merkin was collecting about $25.5 million a year from managing Ascot.
And if you think that set up was similar to Walter’s, try this:
Mr. Merkin was not personally heavily invested in his own Ascot fund. He did not reinvest his $169 million in management fees for the years 1995 to 2007 back into his own fund, says the complaint. All told, Mr. Merkin invested personally and through family trusts and foundations $7 million in Ascot in its first six years, and less than $2 million over the following 10 years.
I’m waiting for criminal fraud charges to compliment the civil ones but I expect those will come from out-of-state, rather than Hartford. Tough to put your golfing buddy in jail, I guess.
For What It's Worth 
Chris – as a lawyer, what do you think would be the basis for criminal charges? Wouldn’t they have to know it was a fraudulent scheme? Would extreme negligence suffice?
What I’m thinking of, Wally, is the transcript of the call between Madoff and FGG’s compliance officer in which Madoff coaches him on what to tell the SEC folks who were coming to question FGG about Madoff. I know that FGG’s counsel says that there’s an innocent explanation for that call but it seems to me that we’re moving beyong negilgence and even deliberate ignorance towards a cover-up. If it’s shown that FGG helped Bernie hide his scheme, then that makes them co-conspirators and they’re in deep criminal trouble. I have no particular desire to see a 78-year-old guy like Walter Noel go to prison just because he trusted other people, but if Andres went off for a period of reflection, I wouldn’t be disappointed.
So right now, the evidence suggests just a civil fraud, but I’m guessing more will be revealed.
Criminal charges, if any, will probably be tax related. FGG collects its money in Bermuda, and the principals only pay US income tax as the money comes in to America. Any fiddling here would likely result in criminal charges. Another possible area of exposure is if FGG accepted cash from investors and failed to report it. A final area would be if Walt tries to hide money from the all-but-inevitable civil judgement.