A judge has thrown out several lawsuits by investors who blame hedge funds for failing to detect Bernard Madoff's massive fraud, saying the one-time Nasdaq chairman "cleverly leveraged his considerable reputation" to dupe even the most sophisticated financial entities, including regulators and Wall Street banks.
In a Friday ruling that was made public Monday, Judge Deborah Batts concluded that investors in the hedge funds run by J. Ezra Merkin were sufficiently warned about risks.
"The list of victims that failed to detect Madoff's fraud is lengthy," Batts wrote, citing the Securities and Exchange Commission among them. "In line with what other courts have done, this court will not recognize a claim against those who did business with Madoff, simply by imputing the suspicions of a few _ albeit, wise _ people who suspected Madoff's fraud before it was ever discovered."
Merkin's funds had put more than $2 billion of investors' money into Madoff's investment business. The Manhattan judge noted that the plaintiffs had cited testimony by Merkin that he was aware of a number of people who were suspicious of the returns Madoff claimed to achieve.
The 73-year-old Madoff confessed in December 2008 that he was running a multi-decade Ponzi scheme and that more than $65 billion he claimed to have on hand for investors had dwindled to a few hundred million dollars from an original investment of about $20 billion. He is serving a 150-year prison sentence.
Batts said there was no basis to let the lawsuits proceed "just because a non-party had a hunch or a gut feeling about Madoff, especially when juxtaposed against his considerable reputation and success within the investment community."
Batts added: "It is now well-established that Madoff cleverly leveraged his considerable reputation in order to perpetrate his massive fraud, for many years, without detection by some of the most sophisticated entities in the financial world: the SEC, Wall Street banks and the like."
The ruling was made after a series of lawsuits were filed by the New York Law School, a pension plan and several family trusts on behalf of investors in three hedge funds: Ascot Partners L.P., Gabriel Partners L.P. and Ariel Fund Limited. Merkin was the general partner of the Ascot and Gabriel funds and the sole shareholder and director of Gabriel Capital Corp., which was the investment adviser to the Ariel Fund.
The lawsuits claimed Merkin and related defendants failed to disclose the funds' investments with Madoff and should have performed better due diligence in connection with the investments.
Messages left for lawyers on both sides were not immediately returned.
Merkin still faces a lawsuit in federal bankruptcy court in which the trustee recovering assets for Madoff investors is seeking more than $500 million. That lawsuit claimed Merkin was aware Madoff was a swindler and called Merkin "a sophisticated investment manager who was a close business and social associate of Madoff."
Merkin managed several funds through his Gabriel Capital Corp. that withdrew more than $500 million in "nonexistent principal" from Bernard L. Madoff Investment Securities in the 13 years before Madoff's massive Ponzi scheme imploded, the lawsuit claimed.
Andrew Levander, a lawyer for Merkin, has said the bankruptcy claim has no basis.