Madoff Trustee Adds Details to Suit Against Financier

In 2003, a research company met with J. Ezra Merkin, a prominent Wall Street financier who had earned a fortune investing his clients’ money with Bernard L. Madoff.

During the meeting, according to a new court filing, Mr. Merkin admitted that he did not fully understand Mr. Madoff’s business and questioned its legitimacy. He warned the unnamed company never to “go long in a big way” with Mr. Madoff. He joked that “Charles Ponzi would lose out because it would be called the ‘Madoff scheme,’ ” according to notes from the meeting.

“Seems to be some probability even in Ezra’s mind that this could be a fraud,” a representative of the company concluded.

The details of that meeting are among the new claims in a lawsuit filed late Friday in Federal District Court in Manhattan by the trustee for victims of Mr. Madoff’s multibillion-dollar swindle. According to the trustee, Mr. Merkin “willfully blinded” himself to numerous indications that Mr. Madoff was a con man.

“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,” wrote the trustee, Irving L. Picard, in the amended complaint, which updated an action originally filed in 2009.

Some new details came from a phone call Mr. Merkin recorded during the fall of 2005, between himself and Mr. Madoff. After a different Ponzi scheme came to light involving the Bayou Group, a hedge fund firm in Stamford, Conn., Mr. Merkin told Mr. Madoff that this would further stoke suspicions about his business.

“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. It’s guaranteed,” Mr. Merkin told Mr. Madoff, according to the lawsuit.

In addition, the trustee contends that Mr. Merkin deceived his clients by concealing that their money was invested with Mr. Madoff. He accuses Mr. Merkin of mixing his own money with investors’ funds, and using at least $92 million from a commingled account to buy paintings by Mark Rothko and other artists.

Since Mr. Madoff’s arrest in December 2008, Mr. Merkin has portrayed himself as a victim. Over the weekend, Mr. Merkin’s lawyer, Andrew J. Levander, issued a statement deploring the trustee’s amended lawsuit. He said his client personally lost more than $100 million in the fraud.

“In desperation to meet a legal burden he cannot meet, Mr. Picard has concocted allegations that he cannot prove,” Mr. Levander said. “These allegations are utterly baseless.”

The lawsuit seeks at least $560 million, an amount that the trustee said Mr. Merkin’s funds withdrew from Madoff accounts before the Ponzi scheme was revealed. Mr. Merkin has not been charged with any criminal wrongdoing.

Last year, to resolve a civil action brought against him by the New York attorney general, Eric T. Schneiderman, Mr. Merkin agreed to pay a $410 million penalty. That case accused Mr. Merkin of deceiving his clients by collecting hundreds of millions of dollars in management fees, when, in fact, he was just funneling money to Mr. Madoff rather than investing it himself.

The trustee is trying to block Mr. Merkin’s deal with the attorney general, arguing that it will hamper his ability to collect money for victims.

Mr. Madoff pleaded guilty in March 2009 and is serving a 150-year sentence at a federal prison in Butner, N.C. Actual cash losses from the Madoff fraud are estimated at about $17 billion, but the paper wealth that was wiped out totaled more than $64 billion. Mr. Picard, the trustee, has thus far recovered about $9.4 billion.

One of the largest pools of victims were clients of Mr. Merkin, an investor and philanthropist who was highly regarded in Wall Street circles. Mr. Merkin counted a number of philanthropies and educational institutions as clients, including Harlem Children’s Zone, New York University and Bard College. He lives at 740 Park Avenue, one of Manhattan’s most prestigious addresses.

Through a web of investment vehicles â€" Ariel Fund Ltd., Gabriel Capital L.P. and Ascot Partners â€" Mr. Merkin was among the largest of the so-called feeders, investors who directed client money to Mr. Madoff. These funds, including the Fairfield Greenwich Group and Tremont Group Holdings, played a key role in helping him expand his Ponzi scheme around the world.

Also included in the trustee’s amended lawsuit is a recounting of a meeting between Mr. Merkin and representatives of Ivy Asset Management, another firm that steered money to Mr. Madoff. At the meeting, Ivy raised questions about the uncanny consistency of Mr. Madoff’s returns.

When Mr. Merkin likened Mr. Madoff to the wizard of Oz, an employee at Ivy said, “Toto is still tugging at the curtain.”

To which Mr. Merkin replied, “The curtain is winning.”