The Curious Case of J. Ezra Merkin

Court papers filed by New York University against New York money manager J. Ezra Merkin reveal that Merkin, who invested $2 billion with Bernard Madoff, was taking investment advice from a convicted felon.Victor Teicher, who was convicted of securities fraud charges in 1995 and barred from the securities industry for using information to trade puts and calls on registered securities, was advising Merkin on the management of the Ariel Fund Ltd., according to The New York Times. Teicher made phone calls from his New Jersey federal prison to Merkin's Park Avenue office, according to the article, which appeared in Saturday's paper. Teicher warned Merkin that Madoff's results were impossible to achieve, according to the Times. So not only did Merkin not disclose to Ariel investors like NYU that he was taking investment advice from Teichner, but he didn't listen to Teichner's advice, who warned it was unlikely that Madoff could have generated those returns.

NYU lost $24 million from the Ariel fund, which forked over $300 million to Madoff (and $2 billion in total from its affiliated funds) without disclosing the relationship with investors. Yet the series of prospectuses for the funds, said Ariel was required to use Gabriel, Merkin's company, as its investment advisor, according to the court papers.

According to Tzvee of Teaneck, New Jersey, who writes Tzvee's Talmudic blog, the depositions and court papers filed by NYU could create a roadmap for Attorney General Andrew Cuomo to indict Merkin in a criminal case. In the court papers, NYU raises the issue of "deliberate ignorance," which came up in the Fifth Circuit Court of Appeals ruling upholding the criminal charges against Enron's Jeffrey Skilling case.

"To cut to the chase, the NYU argument demolishes Merkin by accusing him of the offense of "deliberate ignorance" which, based on the Jeffrey Skilling case, is a crime that rises above the strict criminal standard of reasonable doubt," writes Tzvee, who has been a professor, rabbi and corporate consultant, and offers incisive commentary.

NYU is calling this "willful blindness" in that Merkin didn't pay attention to the red flags or the warnings of Teichner, saying this helped to aid and abet the Madoff fraud.

Though Merkin has told investors he was a victim of the Madoff fraud, NYU doesn't buy that argument. The crux of NYU's argument in the court papers is that year-after-year Merkin provided false information in the quarterly reports by giving the impression that he was managing the Ariel funds, and concealing that the funds were managed by Victor Teicher, a convicted felon, and Madoff. "By handing over substantial portion of the Ariel Funds assets to Madoff, when Merkin either knew or was' deliberately ignorant' of the fact that Madoff's investment results were implausible or likely fraudulent, Merkin breached his contract with investors as well as engaging in gross negligence, fraud or willful misconduct," stated NYU in the court papers.

NYU is also asserting "unjust enrichment" in that Merkin earned management and incentive fees at the expense of NYU and other investors in Ariel. The court papers also recount a face-to-face meeting in October of 2008 between NYU and Merkin in which he brings up the idea of investing in Madoff. NYU rejects the idea citing a lack of oversight over the Madoff funds and that it was inappropriate for an institutional endowment fund. This was met with silence from Merkin, according to the court papers. Little did the university know but NYU was already invested since Ariel was turning over hundreds of millions of dollars to Madoff.So not only did Merkin not disclose to Ariel investors like NYU that he was taking investment advice from Teichner, but he didn't listen to Teichner's advice, who warned it was unlikely that Madoff could have generated those returns. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio