Thursday, October 27, 2011
An investor in a Madoff-feeder fund managed by J. Ezra Merkin recently won a $7 million arbitration award in a AAA proceeding (Straus v. Merkin, 13-148-Y-001800-10 Oct. 12, 2011DownloadARBITRAL AWARD V EZRA MERKIN) and seeks to confirm the award in New York Supreme Court. In a reasoned award, the majority of the panel found that Merkin was liable for material misstatements and omissions under the New Jersey Securities Act. Specifically, Merkin did not disclose to this investor (although he did to many others) that the fund was nothing more than a feeder fund for Madoff. Instead, the documentation at the time of the investment represented that Merkin determined the investment strategy. In addition, the panel found that, over their nine-year association, Straus and Merkin had no discussions about the true nature of the investment and that Straus did not learn of other information that should have alerted him to the extent of Madoff's involvement.
What is particularly interesting about the award is that the majority addresses a Sept. 23, 2011 decision from the S.D.N.Y. (In Re Merkin and BDO Seidman Securities Litig.) that found no violation of Rule 10b-5 on similar allegations. Judge Batts determined that there had been insufficient allegations of a material misstatement or omission in the context of the broad discretion in the agreement to use other fund managers. "The answer to Respondent's assertion that Judge Batts' determination warrants a dismissal of the claim before this Panel is that the majority disagrees with Judge Batts' conclusions." While the arbitration award was based on state securities law, "where [the issues] coincide, the majority respectfully disagrees with her conclusion."
Another good example where arbitration can result in a decision that is more pro-investor than would be achieved in court.