Clients of J. Ezra Merkin, a prominent Wall Street hedge fund manager who invested his investors’ money in Bernard L. Madoff’s epic Ponzi scheme, will recover more than $400 million under a civil settlement negotiated by the New York State attorney general’s office.
The deal, the first settlement of a government action against Mr. Merkin, was approved by a New York state judge late Friday, according to people in the office of New York Attorney General Eric T. Schneiderman. The agreement is expected to be publicly announced on Monday.
Mr. Merkin, whose funds lost roughly $1.2 billion when Mr. Madoff’s fraud collapsed in December 2008, has agreed to pay $405 million over three years to compensate his investors. He also will pay an additional $5 million to the state to cover fees and investigative costs, the state sources said.
The agreement settles a civil fraud case the attorney general’s office filed against Mr. Merkin in April 2009. That case, initiated by Andrew M. Cuomo, who has since become governor, accused Mr. Merkin of deceiving his clients by collecting hundreds of millions of dollars in management fees when, in fact, he was simply handing money over to Mr. Madoff, not managing it himself.
The settlement, however, may face a legal challenge from the bankruptcy court trustee, who is collecting money to compensate all eligible victims of the Madoff fraud. In March 2009, Mr. Madoff confessed that he had operated a long-running Ponzi scheme, one that affected thousands of investors around the world. Cash losses in the scheme are estimated at a minimum of $17 billion, but the paper wealth wiped out by the fraud totaled more than $64 billion. Mr. Madoff is serving a 150-year sentence in a federal prison in North Carolina.
The attorney general’s settlement with Mr. Merkin would benefit investors in his four private funds: Ariel Fund Ltd., Gabriel Capital L.P., Ascot Fund Ltd. and Ascot Partners.
Mr. Schneiderman has previously said that more than 10 percent of the money invested in those funds belonged to charities and other nonprofit institutions, including Bard College, New York Law School, the Harlem Children’s Zone and the Metropolitan Council on Jewish Poverty in New York.
The complex formula for distributing the money to Merkin investors calls for those who were not aware of Mr. Merkin’s ties to Mr. Madoff to recover a larger percentage of their losses than those who knew of Mr. Madoff’s involvement.