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Entries in Madoff (34)


Madoff Trustee Seeks $189 Million in Clawback Suits

The trustee overseeing the liquidation of Bernard Madoff's failed Ponzi scheme filed another set of lawsuits seeking to "claw back" nearly $180 million from four entities that invested with Madoff through investment accounts with 'feeder fund' Fairfield Sentry.  Fairfield Sentry was the largest of the so-called 'feeder funds' that funneled billions of dollars into Madoff's scheme.  Irving Picard, the court-appointed trustee, earlier this year reached a settlement with Fairfield Sentry that allows Picard to pursue clawback actions against Fairfield Sentry investors.  According to Picard, Fairfield Sentry received approximately $3 billion in avoidable transfers from Madoff during the six years preceding the collapse of the scheme.

Picard is seeking the return of nearly $190 million from Atlantic Security Bank ("ASB"), Trincaster Corporation ("Trincaster"), Bureau of Labor Insurance ("BLI"), and Naidot & Co ("Naidot").  With the exception of New Jersey-based Naidot, the remaining three companies are foreign companies, with ASB based in Panama, Trincaster in Switzerland, and BLI in China.  A list of the amounts sought from each entity is provided below:

  • Atlantic Security Bank - $120,168,691
  • Trincaster Corporation - $13, 311,800
  • Bureau of Labor Insurance - $42,123,406
  • Naidot & Co. - $13,654,907

These clawback actions derive their authority from various federal and state laws.  Under Sections 550 and 551 of the Bankruptcy Code and various sections of the New York Debtor & Creditor Law, initial and subsequent transfers from a debtor within the six-year time period preceding the filing of a bankruptcy petition are subject to avoidance.  

Including the four suits filed today, Picard has now filed clawback lawsuits seeking nearly $1 billion from Fairfiield Sentry customers, including lawsuits against the investment arm of Abu Dhabi (LINK) and the National Bank of Kuwait.

The Complaints against each entity are here: Atlantic Security, Bureau of Labor Insurance, Naidot, and Trincaster

Related Ponzitracker coverage:

Madoff Trustee Files Seven Clawback Lawsuits Against Feeder Fund Investors

Madoff Trustee Fires Next Salvo of Clawback Lawsuits

Madoff Trustee Files Five More Clawback Lawsuits Against Feeder Fund Investors Seeking Nearly $100 Million

Madoff Trustee Seeks $300 Million From Abu Dhabi Investment Arm


JP Morgan Files Brief in Support of Effort to Dismiss Madoff Trustee's Case

JP Morgan filed a strongly-worded reply in support of its effort to win dismissal of Madoff trustee Irving Picard's suit seeking billions from the bank.  In a September 16th filing, JPMorgan ("JPM") argued not only that Picard was "mistaken" in bringing the claims, but that his rationale was contrary to established legal precedent and was "clearly wrong".  Picard is currently seeking nearly $20 billion in damages from JPM, claiming that their longstanding banking relationship with Madoff both lent an air of legitimacy to the scheme and further allowed Madoff to continue defrauding victims despite numerous red flags.  While he initially sought $5.4 billion, Picard later tripled the amount sought in an amended complaint, asserting numerous common law claims.  

JPM is quick to point out that Picard's approach in seeking damages from various financial entities associated with Madoff based on common law theories has not been well received, most recently in Judge Jed Rakoff's dismissal of similar claims asserted against HSBC.  The crux of Judge Rakoff's reasoning, and unsurprisingly strongly asserted by JPM, rested in the premise that a bankruptcy trustee, who stands in the shoes of the debtor, cannot simultaneously bring claims on behalf of creditors.  As JPM states, 

Since the Supreme Court’s decision in Caplin v. Marine Midland, 406 U.S. 416 (1972), it has been settled law that a trustee for a bankrupt corporation does not have power to assert claims belonging to the debtor’s creditors. 

In his Response to JPM's Motion to Dismiss, Picard had stated that his authority to pursue claims against JPM stemmed from Section 544(a) of the Bankruptcy Code, which endows a trustee with the rights of a “creditor that extends credit to the debtor at the time of the commencement of the case.” 11 U.S.C. § 544(a).  However, such a grant of rights does not equate to a carte blanche to pursue claims that, according to JPM, rest solely with third-party creditors.  As JPM so eloquently states, Picard does not represent the interests of third-party creditors, but rather, "stands in the shoes of a thief."  

JPM also reverts to its original claim that Picard had failed to sufficiently plead his claims above the required legal standard, pointing to the "massive gap between the Trustee’s blustering accusations and the facts that he has actually alleged to support them. Despite taking extensive pre-trial discovery, the Trustee has still completely failed to allege facts showing that any individual at JPMorgan had actual knowledge of Madoff’s fraud."  In doing so, JPM highlights the increasingly heightened standard in which financial institutions can be held liable for fraud committed by customers.  Courts have increasingly adopted an "actual knowledge" standard, rather than what an institution should have known based on the presence of red flags.

Finally, JPM contests Picard's claim that a trustee appointed under the Securities Investor Protection Act ("SIPA") has even greater powers than a trustee proceeding under the United States Bankruptcy Code.  In doing so, JPM argues that nothing provides Picard with authority for such an interpretation, and cites Judge Rakoff's rationale in the recent HSBC decision that "the Trustee’s powers are cabined by Title 11, and SIPA conveys no authority to a SIPA trustee to bring the common law claims here in issue.”  

With this filing, absent the request by Picard to file a sur-reply, briefing of the issue is now complete.  A hearing may also be scheduled before United States District Judge Colleen McMahon, who is overseeing the case.  

JPMorgan's Reply in Support of its Motion to Dismiss is here.

The Amended Complaint filed against JPMorgan is here.



Madoff Trustee Sets Record Date of September 15th for Victims Entitled to First Distribution

According to a court filing by the trustee tasked with marshalling assets for the benefit of victims of Bernard Madoff's multi-billion dollar Ponzi scheme, investors holding claims as of September 15th, 2011, will be entitled to receive the $272 million set aside for a first interim distribution.  Additionally, Irving Picard, the court-appointed trustee, also stated that holders of claims that were sold or transferred are eligible to receive a distribution only if the sale or transfer of the claim was made on or before August 25, as such sale or transfer is subject to a 21-day notice and objection period.  As Bloomberg reports, the initial distribution will go out by the end of the third quarter, or September 30th.  

In his Motion for an Order Approving Initial Allocation of Property (the "First Distribution Motion"), filed May 4, 2011 and approved by United States Bankruptcy Judge Burton R. Lifland on July 12, 2011, Picard sought to make an initial distribution of $272 million to Madoff victims, an amount that Picard stated would have been much higher if not for the pending appeals preventing the availability of additional funds.  As explained by Picard,

The reduced amount is the result of various appeals that have been filed, including, but not limited to, the appeal relating to the “net equity” dispute, ... the appeals relating to the $5 billion Picower settlement, ... and the appeal relating to the settlement with the Levy family.

The distributions will be paid on claims relating to 1,224 former accounts at Madoff's brokerage.  According to Picard, the average payment amount to each of those holders will be $222,551.12.

Legal developments since the First Distribution Motion have bolstered the position of investors Picard termed "net losers" whose account losses exceeded any withdrawals.  The most important decision was the August 16th order of the Second Circuit Court of Appeals affirming the method Picard used to determine investor claims.  While some investors argued that they were entitled to recover the market value of the securities reflected on their last account statement before Madoff's scheme collapsed, Picard disagreed, arguing that the class of customers with allowable claims were those who deposited more cash in their investment account than they withdrew.  The Second Circuit agreed with Picard's method, stating that:

Use of the Last Statement Method in this  case would have the absurd effect of treating fictitious and arbitrarily assigned paper profits as real and would give legal effect to Madoff’s machinations. 

This decision was an important victory for Picard, who was forced in his First Distribution Motion to "maintain... significant reserves, which decrease the amount available for distribution from approximately 44% to approximately 13%."  This percentage was further reduced to 4% of claims due to various settlements under appeal.  Assuming that the Second Circuit's order is not appealed to the Supreme Court, it is likely that Picard's next distribution to investors will have significant additional funds available.

A Copy of the First Distribution Motion is here.

A Copy of Picard's filing setting the Record Date is here.

A Copy of the Second Circuit's Order Affirming the Net Investment Method is here.


Milberg LLP Founder Seeks Dismissal of Madoff Trustee's Clawback Suit

The former co-founding partner of Milberg LLP is seeking to dismiss a clawback suit filed by the court-appointed trustee seeking assets for victims of Bernard Madoff's Ponzi scheme, alleging that the funds sought are beyond the time periods allowable under Bankruptcy and New York state law.  Irving Picard, the court-appointed trustee, filed suit in November 2010, seeking the return of over $20 million in false profits from Melvyn Weiss and David J. Bershad.  Both are former lawyers in Milberg, which was later disbanded after admitting to paying clients to file securities fraud lawsuits.

In the filing, Weiss argues that Picard is prevented from recovering any alleged false profits due to the length of time over which the profits were made, stating

“The trustee’s claims violate the statutory ‘look back’ periods limiting avoidance to six years prior to the filing date for state law,”

Both the Bankruptcy Code and New York state law govern the time period preceding the filing of a bankruptcy petition that a trustee may recover transfers from the debtor.  Under the Code and New York law, the maximum length of time preceding the petition filing date is six years.  According to Weiss, Picard is seeking the return of funds acquired over a fifteen-year period.  Picard has sought the return of funds from defendants in similar cases beyond the six-year limitation, but on the premise that those defendants knew or should have known of the fraudulent nature of the transfers.  Weiss attempts to distinguish those cases, arguing that Picard has not demonstrated that Weiss knew or should have known of Madoff's fraud.  

Weiss also asked United States Bankrtupcy Judge Burton L. Lifland to transfer the case to a district court, arguing that the case involved issues raising non-bankruptcy questions and would be more appropriately decided in a federal court.  


Judge Rejects HSBC Settlement With Madoff Feeder Fund

A federal judge refused to approve a proposed settlement between HSBC Holdings and Thema, an Irish fund that acted as a 'feeder fund' in funneling money to Bernard Madoff's Ponzi scheme.  HSBC acted in a custodial role for Thema International Fund, whose investors lost their entire investment valued at over $300 million to Madoff's scheme.  The two parties had announced in June that they had reached a settlement in which HSBC, while admitting no wrongdoing, would pay $62.5 million, or roughly 20% of Thema investor losses.  The balance in the fund at the time of Madoff's arrest was over $1 billion, but most of those profits were fictitious.

United States District Judge Richard Berman, while noting that he generally favored the settlement of suits - especially class actions - noted several "obvious deficiencies" in refusing to accept the proposed settlement, including the setting aside of a $10 million reserve for attorney's fees to pursue claims against non-settling defendants also named in the suit.  Judge Berman also took issue with what he perceived as the inadequate disclosure of legal costs.  Reflecting on the settlement, Judge Berman noted that while he would consider a revised accord, the current settlement was "not fair, reasonable or adequate -- even at this preliminary stage." 

Proposed settlements, while subject to a judicial stamp of approval, are routinely approved and viewed as essential to trimming judicial dockets of cases that should not be tried.  The rejection is notable in that HSBC had recently won the dismissal of common law claims filed by Irving Picard, the court-appointed trustee overseeing the liquidation of Madoff's failed brokerage.  There, United States District Judge Jed S. Rakoff had ruled that Picard lacked standing to bring those claims against HSBC, and that the proper party to bring those claims were the wronged investors.  Picard has appealed that decision to the Second Circuit Court of Appeals.

A Copy of Judge Berman's Order is here.