Judge Trims Madoff Trustee's Suit Against Merkin Funds

Judge Trims Madoff Trustee's Suit Against Merkin Funds Bernie Madoff

Irving Picard of Baker & Hostetler, the liquidation trustee for fraudster Bernie Madoff’s former firm, suffered a new setback late Tuesday in his bankruptcy court fight with J. Ezra Merkin and the Madoff investment vehicles he managed.

In a 66-page ruling, U.S. Bankruptcy Judge Stuart Bernstein in Manhattan dismissed nine out of 13 claims in a long-running lawsuit in which Picard sought to claw back millions from Merkin and the so-called feeder funds he managed. Bernstein found that Merkin, who profited handsomely from directing more than $2 billion in investor money to Madoff, lacked actual knowledge of Madoff’s fraud.

Picard and his colleagues at Baker & Hostetler did manage to persuade the judge that they’d adequately alleged that Merkin was willfully blind to Madoff’s Ponzi scheme. That aspect of Bernstein’s ruling means that Picard can move forward with a bid to recover $313.6 million that Madoff’s firm transferred to Merkin and his entities before it collapsed. Picard had originally sought to claw back $564 million. In a statement, a spokesperson for the trustee said that Picard can also seek subordination of claims by Merkin and his funds to $550 million from the Madoff firm’s estate.

Overall, it’s been a tough week for Picard in litigation involving Merkin and his funds. As we reported, a different judge in Manhattan ruled on Aug. 8 that Picard can’t block a $410 million settlement Merkin reached with New York Attorney General Eric Schneiderman. Picard’s legal team, led by Baker & Hostetler partner David Sheehan, argued that the settlement impaired the trustee’s ability to recover on his avoidance claims.

Picard commenced the action back in 2009, not long after Madoff’s extraordinary fraud was exposed. After four years of discovery, Baker & Hostetler filed a 13-count amended complaint in August 2013. The complaint named as defendants Merkin and four entities he ran—Gabriel Capital Corp., Gabrial Capital LP, Ascot Partners LP and Ascot Fund Ltd. Picard’s discovery efforts cost $28 million, according to a court filing by Merkin’s lawyers at Dechert.

The first eight counts in the August 2013 amended complaint were “avoidance” claims in which Picard sought to claw back payouts Merkin and his entities received from Madoff’s firm. Under bankruptcy law precedent, Picard had to show that Merkin was aware of Madoff’s fraud in order to hold him liable under seven of those eight counts. The remainder of the complaint contained a kitchen sink of sought-after equitable remedies.

In Tuesday’s ruling, Bernstein found that most of Picard’s evidence suggested that Merkin had something less than actual knowledge of Madoff’s fraud. Perhaps the trustee’s strongest allegation, Bernstein wrote, was that Merkin told a research firm that Madoff “appeared” to be running a Ponzi scheme and that Ponzi schemes might one day be called Madoff schemes. The judge wrote that the comments “do not imply the level of certainty or absence of substantial doubt associated with actual knowledge” and seem “more like jokes than acknowledgments.”

Dechert partner Andrew Levander, who represents Merkin and Gabriel Capital, issued a statement praising the decision. “We are pleased that the court has dismissed the vast majority of the trustee’s baseless claims as a matter of law,” Levander said. “We strongly believe that what little remains of the trustee’s claims are factually without merit.”

Casey Laffey and James McCarroll of Reed Smith represent Gabriel Capital LP. Judith Archer, David Barrack and others at Fulbright & Jaworski represent Ascot Partners LP. Douglas Hirsch and Jennifer Rossan of Sadis & Goldberg represent Ascot Fund Ltd.

Amanda Remus, a spokesperson for the trustee, said in a statement that Picard and his counsel “are prepared to move to trial in which they will be seeking approximately $315 million in two-year transfers.” Remus also said that the decision allows Picard to seek “equitable subordination of the claims made by the Merkin funds to the [trustee] of approximately $550 million.”

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