Two Cerberus Capital Management portfolio companies are caught up in the Bernard Madoff scandal now rocking Wall Street.
A Cerberus portfolio company, Japanese bank Aozora, revealed that it has some $137 million in exposure to Bernard L. Madoff Investment Securities, which has allegedly defrauded its investors in a massive Ponzi scheme. The bank, which suffered a loss in its fiscal first half year, said that the Madoff exposure is not expected to be material to the bank’s performance.
In addition, Ezra Merkin, the chairman of GMAC Financial Services, a major Cerberus portfolio company, controls an investment entity that may have lost $1.8 billion in the Madoff fraud.
Aozora was part of the Cerberus-led investment group that acquired 51 percent of GMAC from General Motors in 2006 for $7.4 billion.
Merkin, the scion of a prominent New York family, is managing partner of Gabriel Capital Group. Gabriel controls Ascot Partners, which aggregated some $1.8 billion of investor capital and fed this into the alleged fraudulent investment scheme. A recent corporate biography of Merkin notes that he manages $5 billion in a family of hedge funds.
At least one investor in the Ascot fund, New York Law School, has filed suit against Merkin, claiming “bad faith breach of fiduciary duty”.
Merkin’s lawyer has reportedly responded that Merkin and his family are the “largest victims of the massive fraud”.
Other Ascot investors included a charitable trust established by real estate maven Mortimer Zuckerman.
Merkin’s troubles come at a time when GMAC is reeling due to the collapse of the financial markets. Cerberus recently informed GMAC’s bondholders that the financial services company may have to file for bankruptcy if a bond-exchange plan is not approved. The company said recently it may fail in its quest to become a bank holding company because it lacks adequate capital.
Gabriel Capital and Cerberus last year teamed on a joint bid for a controlling stake in Israel’s Bank Leumi, but the effort ultimately failed.