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Entries in Madoff (34)


Madoff Trustee Files Seven Clawback Lawsuits Against Feeder Fund Investors

The court-appointed trustee overseeing the liquidation of Bernard L. Madoff Investment Securities filed seven "clawback" lawsuits seeking the return of at least $173 million from entities that invested in one of the largest feeder funds to Madoff's scheme.  Irving Picard, the trustee, filed the suits after previously negotiating a settlement with the feeder fund, Fairfield Sentry, that allowed him to claw back profits from investors who placed funds with Madoff through Fairfield.  Last week, Picard filed suit against the Abu Dhabi Investment Authority seeking $300 million from investments with Fairfield.

The lawsuits, termed "clawback" suits, proceed under bankruptcy and state law allowing avoidance of transfers of funds made by Madoff to both initial transferees and any subsequent transferees.  According to the complaints, a total of $3 billion was transferred from Madoff to Fairfield during the six-year period preceding BLMIS' bankruptcy filing.  The seven entities sued by Picard and amount sought are as follows:


  • Concord Management LLC - $10 million
  • Parson Finance Panama S.A. - First Gulf Bank - $11.1 million
  • Lion Global Investors Limited - $50 million
  • Meritz Fire & Marine Insurance Co. Ltd. - $21.8 million
  • Quilvest Finance Ltd. - $37.8 million
  • Orbita Capital Return Strategy Limited - $30.6 million


The lawsuits were filed by David Sheehan, counsel to Picard.

Each complaint can be found here.


Appeals Court Affirms Madoff Trustee's Claim Determination Method

A New York appellate court issued an opinion today affirming the method used to determine loss amounts suffered by victims of Bernard Madoff's colossal Ponzi scheme. Under this method, each Madoff victim's net equity was calculated by crediting the amount of cash deposited by the customer into his or her account, less any amounts withdrawn from the account. Irving Picard, the court-appointed trustee overseeing the liquidation of Madoff's failed broker-dealer, had faced opposition from groups of investors (the "Objecting Investors") who instead urged the use of each investor's last reported account statement balance before Madoff's scheme was exposed.

Following United States Bankruptcy Judge Burton R. Lifland's opinion affirming Picard's use of the net investment method, several investor groups appealed the decision to the Second Circuit Court of Appeals. Addressing the arguments of Picard and the Objecting Investors, Chief U.S. Circuit Judge Dennis Jacobs first noted that SIPA's statutory language  "does not prescribe a single means of calculating net equity that applies in the myriad circumstances that may arise in a SIPA liquidation."   Instead, such a determination should be based on specific fact patterns. Weighing the differing approaches set forth by the parties, Judge Jacobs concluded that:

Mr. Picard's selection of the Net Investment Method was more consistent with the statutory definition of net equity than any other method advocated by the parties or perceived by this Court. There was therefore no error...If the Last Statement Method were adopted, those claimants who have withdrawn funds from their BLMIS accounts that exceed their initial investments would receive more favorable treatment by profiting from the principal investments of those claimants who have withdrawn less money than they deposited, yielding an inequitable result.

Further elaborating on this reasoning, Judge Jacobs emphasized the underlying fact that the customer statements were nothing more than after-the-fact constructs that were simply molded to reflect historical market transactions. Adoption of the Last Statement Method, theorized Judge Jacobs, would simply serve to serve as a stamp of judicial approval of Madoff's fraud. He concluded that the 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.

The ruling today has several important ramifications. First, investors who withdrew more than their original principal investment, termed net winners by Picard, are not entitled to share in any funds recovered by Picard for the benefit of defrauded investors. To date, that amount has increased to over $10 billion. Second, by virtue of excluding these so-called net winners from any right to recovered funds, the number of customers with viable claims is diminished, and more funds are available to investors whose invested principal exceeded any withdrawals.

The decision has implications for the now-ongoing process of distributing recovered funds back to defrauded investors. As previously covered by Ponzitracker, Picard filed a motion with the court in May seeking approval of his plan to make the first interim distribution to investors. In that motion, he outlined several theoretical calculations of the percentage each investor would expect to receive under the first distribution, with the variations resulting from different figures for the total amount of allowed claims. When the motion was filed, Judge Burton Lifland's approval of Picard's use of the net investment method to calculate distribution to investors had been appealed to the Second Circuit. While Picard sought to use the figure of $17.3 billion, which represented his estimate of the total principal losses suffered by Madoff investors, the pendency of the net investment method decision forced him to instead use the much-larger figure of nearly $57 billion to calculate investor distributions, which represented the aggregate amount of purported holdings as determined by each investor's final account statement. Thus, investors would receive a lower pro rata share of their claim amount.  As Picard stated,

Were the Net Equity Decision to be reversed, those claims of net winner customers that have been denied to date may become allowable and eligible for a distribution from the Customer Fund. In order to ensure that there are funds sufficient to make a pro rata distribution in that eventuality, the Trustee is maintaining significant reserves, which decrease the amount available for distribution from approximately 44% to approximately 13%.

Additional pending appeals further reduced the pro rata amount of each investor's proporsed distribution down to just over 4% of each approved claim. Barring the grant of certiorari (review) by the United States Supreme Court, investors with allowed claims now stand to receive a greater amount in future distributions. Picard has indicated that the first interim distributions are scheduled to commence in September, and it remains unknown as to whether those amounts could change in light of this decision.

A copy of the Second Circuit opinion is here.


Madoff Trustee Seeks $300 Million From Abu Dhabi Investment Arm

Irving Picard, the court-appointed trustee tasked with recovering assets for defrauded investors of Bernard Madoff's massive Ponzi scheme, filed suit against the entity that acts as an investment arm of the Emirate of Abu Dhabi.  According to the complaint, the Abu Dhabi Investment Authority ("ADAI") withdrew approximately $300 million from investments with a Madoff feeder fund, Fairfield Sentry Limited, that are avoidable under New York and federal bankruptcy law.  

The lawsuit is the latest strategy taken by Picard, who, in his earlier settlement with Fairfield Sentry Limited, had negotiated for the right to 'clawback' profits from investors who had placed funds with Madoff indirectly through Fairfield's family of feeder funds.  At issue are so-called "subsequent transfers" made from Fairfield to ADIA.  Picard alleges that, of the over $3 billon withdrawn from Madoff's broker-dealer by Fairfield, approximately $300 million was subsequently transferred for the benefit of ADIA.  Picard is proceeding under Section 550 of the Bankruptcy Code, which allows a trustee to recover an avoidable transfer from the initial transferee or any immediate transferee of such initial transferee.  

Picard has filed more than 1,000 lawsuits seeking funds for Madoff victims, which have resulted in a recovery of over $10 billion to date.  Investors in Madoff's scheme are estimated to have lost $17.3 billion in principal.

A copy of the ADIA Complaint is here.


Judge Grants Dismissal of Madoff Trustee's Common Law Claims Against Bank Austria

When Judge Jed S. Rakoff recently granted the dismissal of Irving Picard's common-law claims against HSBC, included in the order was an innocuous footnote at the bottom of page 25 stating that "Although it seems clear that these claims would also have to  be dismissed against any other defendants who appeared and so moved, no other such defendant has so moved."  In the ensuing days, several of the other banking institutions sued by Picard obliged, including JP Morgan and Unicredit Bank Austria.

In an order signed Saturday, August 6, and filed on the Court docket the following Monday, Judge Rakoff granted the dismissal of common-law claims asserted by Picard against Unicredit Bank Austria.  As requested by Bank Austria, the previous order dismissing common-law claims against HSBC was ordered amended to include a dismissal of the common-law claims consisting of counts twenty through twenty-four asserted against Bank Austria in Picard's amended complaint.

With this dismissal, the total amount sought by Irving Picard, the court-appointed trustee overseeing the liquidation of Bernard Madoff's massive Ponzi scheme, continues to decrease.   The amount is set to further decrease should the Court follow its rationale in ruling on JP Morgan's still-pending motion to dismiss similar common-law claims, including treble-damages claims based on the Racketeer Influenced and Corrupt Organizations Act.  

A copy of the Order is here.




Bankruptcy Judge Denies Cohmad Motion To Dismiss 

The trustee for Bernard Madoff's failed Ponzi scheme scored a victory when a United States Bankruptcy Judge denied a bid to dismiss claims seeking $245 million in fraudulent transfers.  Irving Picard, the court-appointed trustee overseeing the liquidation of Bernard L. Madoff Investment Securities ("BLMIS"), had sued Cohmad Securities Corp. in June 2009, asserting that the broker-dealer formed by Madoff and his close friend Sonny Cohn functioned primarily to divert billions of dollars into Madoff's scheme.  Cohmad later filed a motion to dismiss Picard's claims, asserting that Picard had failed to plead his claims with requisite particularity, and thus warranted dismissal.  United States Bankruptcy Judge Burton R. Lifland denied Cohmad's motion to dismiss, finding that Picard had sufficiently pled his claims.

In his complaint, Picard had alleged that Cohmad, its registered representatives, its co-founder Cohn, and certain relatives of Cohn all held investment advisory accounts with BLMIS.  Collectively, these individuals withdrew over $100 million from their accounts at BLMIS before the fraud was discovered.  Under federal bankruptcy laws, Picard sought to avoid these withdrawals as fraudulent transfers.  Under Rule 9(b) of the Federal Rules of Civil Procedure, actual fraudulent transfer claims brought under the federal Bankruptcy Code or under New York law must satisfy heightened pleading requirements.  Judge Lifland found that Picard's attachment of seventeen exhibits detailing each withdrawal of fictitious profits satisfied these heightened pleading requirements.

Picard also sought return of fees or commissions paid as incentive for the referral of victims to Madoff's scheme. As a result of referring several billions of dollars in investor funds, Cohmad received a substantial amount of commissions from BLMIS.  By instituting a dual system of payments, in which BLMIS would pay monthly commissions to Cohmad, who would in turn distribute commissions to individual representatives, Picard alleged this was indicative of Cohmad's knowledge of the fraud.  From January 1996 to 2008, Picard alleged total commission payments totalling nearly $100 million.  These payments, alleged Picard, constituted nearly all of Cohmad's income during the eight years leading up to 2008.  In ruling that Picard had satisfied pleading requirements for the commissions, Judge Lifland again cited exhibits attached by Picard detailing these payments with requisite particularity. 

Finally, Judge Lifland rejected Cohmad's contention that Picard was only entitled to seek fraudulent transfers from the date of the filing of the complaint against Cohmad in June 2009.  Instead, as asserted by Picard, the proper 'look-back' date to determine the amount of fraudulent transfers was the date Madoff was arrested and charged with securities fraud, on December 11, 2008. 

The case number is 09-01305-brl.