The receiver in the Bernard Madoff case has amended his lawsuit against Madoff feeder-fund manager J. Ezra Merkin, alleging that the former GMAC Financial chairman knew his friend was running a fraud as much as five years before it collapsed.
In the new filing, Irving Picard alleges that Merkin told a research company that he didn't understand Madoff's business and warned against going "long in a big way" because "Charles Ponzi would lose out because it would be called the 'Madoff scheme.'"
Notes from the meeting added that there "seems to be some probability even in Ezra's mind that this could be a fraud."
The amended lawsuit also cites a 2005 phone call between Merkin and Madoff, which the latter recorded, following the revelation of the Bayou Group hedge fund fraud.
"You know, I always tell people, as soon as there is a scam in the hedge fund industry, someone is going to call about Bernie," Merkin said on the call. "It's guaranteed."
Merkin clients lost millions in Madoff's $65 billion Ponzi scheme; Picard is seeking at least $560 million from him and to block a $410 million settlement with the New York Attorney General.
"Despite Merkin's knowledge that Madoff was running a Ponzi scheme, that Bernard L. Madoff Investment Securities was a fraud, and that Madoff could not have achieved his incredible returns, Merkin never pressed Madoff for an explanation but instead participated in Madoff's fraud," Picard alleged. The trustee also accuses Merkin of comingling his funds with investors, using $92 million of the pool to buy paintings.
"In desperation to meet a legal burden he cannot meet, Mr. Picard has concocted allegations that he cannot prove," Merkin's lawyer, Andrew Levander, said. "These allegations are utterly baseless."