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Ezra Merkin's Gabriel Capital hedge fund is dissolving itself after racking up serious losses this year - in no small part, thanks to Bernard Madoff's $50 billion Ponzi fraud. One of the things Gabriel Capital will be divesting is its roughly 5% interest in Bank Leumi.

On December 18, Merkin advised clients of Gabriel Capital that after losing 39% this year to the end of November, the fund's "only realistic option" was to close down. The process will take years, however, because the assets are illiquid.

Three years ago Gabriel Capital teamed up with Cerberus, another hedge fund group, to buy the controlling interest in Bank Leumi from the state. However, after they'd bought 10% of the bank's stock, the two funds were disqualified from owning a controlling interest. They split the stake into two pieces of 5%.

Now Gabriel is being forced by the circumstances to sell its stake, which could get it around NIS 650 million at current prices. Bank Leumi stock has lost 50% of its value this year.

Ezra Merkin has another tie with Bank Leumi. In June, Bank Leumi set up a new hedging company in the United States called Spring Mountain Capital, with the hedge fund company SMC. Merkin had been the one to mediate the deal and he also sits on SMC's board.

Gabriel has about $1.5 billion in assets under management and is now being sued because of its investments though the Bernard L. Madoff Investment Securities.

The investors argue that they'd been promised the fund invested in diversified assets but behaved recklessly and breached its fiduciary duties. Merkin argues that he himself and his families are among the worst-hurt victims of Madoff's fraud.

Madoff, meanwhile, is under house arrest after failing to come up with the collateral to back his $10 million bail.