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Entries in Madoff (34)


SIPC Files Motion Opposing Wilpon Efforts to Dismiss Case

The Securities Investor Protection Corporation ("SIPC") filed documents opposing an effort by Sterling Equities, consisting of owners of the New York Mets baseball team, to dismiss trustee Irving Picard's suit seeking $1 billion transferred by Bernard Madoff. During a hearing on July 1 in New York federal court, United States District Judge Jed S. Rakoff questioned the viability of Picard's approach, which seeks not only to recover the $300 million in false profits above Sterling's initial investment, but also the $700 million of initial principal on the notion that the Mets' owners knew or should have known of the fraud through their extensive dealings and relationship with Madoff.  SIPC is in agreement with Picard that a reading of bankruptcy law permits the trustee's approach.

The vast majority of actions filed by Picard have sought only fictitious profits above and beyond an investor's initial principal.  This course of action is pursuant to Section 548(c) of the Bankruptcy Code, which states that a transferee who receives funds that would otherwise be subject to avoidance under the Code is entitled to retain those fund when the transferee gives value and the transfer is taken in good faith.  Picard has not pursued such a position in nearly all of his lawsuits, instead seeking the return of profits from so called "net winners" of Madoff's scheme for pro rata distribution to defrauded investors aptly termed "net losers."

Picard alleges that Sterling Equities and its principals should have been alerted to the nature of Madoff's scheme through numerous red flags and warning signs.  Additionally, their involvement in litigation seeking the return of principal and fictitious profits from an investment in the Bayou Superfund, which was later revealed to be a massive Ponzi scheme, should have also alerted Sterling to Madoff's fraud.  Instead, as Picard and SIPC allege, the profitable nature of the relationship with Madoff caused the Sterling defendants to ignore these warnings.  As SIPC states,  

The long-term nature of the relationship and its scope enabled the Defendants to gain insight into Madoff and his operations. In the face of such knowledge, the actions of the Defendants, as alleged in the Complaint, are proof of the Defendants’ lack of good faith, and their inability, therefore, to establish good faith as a defense to the Trustee’s fraudulent conveyance claims against them. 

A copy of SIPC's Motion Opposing the Sterling Defendant's Motion to Dismiss is here


Madoff Trustee Withdraws Several Claims Against UBS

As reported in conflicting news reports today, Irving Picard, the trustee appointed to liquidate the Bernard Madoff Ponzi scheme, has withdrawn several legal claims in one of the cases filed against UBS and various entities collectively seeking nearly $2.6 billion.  While Bloomberg reported that Picard sought to drop up to $2 billion of that amount in a 'tactical' move by Picard, further analysis into the issue reveals that while Picard may indeed be making a tactical decision, he is by no means throwing in the towel on nearly $2 billion of potential recovery for defrauded victims.  

Some background on the UBS litigation helps provide clarity.  Picard filed two lawsuits against UBS and various feeder funds in November and December 2010.  The November 2010 lawsuit was against UBS and several international feeder funds including Luxalpha and Groupement Financier (the "UBS/Luxalpha Complaint").  In that lawsuit, Picard accused those entities of withdrawing nearly $2 billion from Madoff in the six years before the scheme collapsed.  Included in the various counts alleged in the UBS/Luxalpha Complaint were counts for aiding and abetting fraud and aiding and abetting breach of fiduciary duty.  These counts were based on Picard's assertion that various indicia of fraud meant that UBS knew or should have known of Madoff's fraud and instead turned a blind eye.

In December 2010, Picard filed suit against UBS and various feeder funds, including a fund created by UBS solely to invest with Madoff called the Luxembourg Investment Fund (the "UBS/LIF Complaint").  In that suit, Picard did not assert claims for the aiding and abetting of fraud or breach of fiduciary duty, but rather nearly all claims based in bankruptcy seeking money withdrawn by the UBS/LIF defendants during the six years prior to the filing of bankruptcy by Madoff's defunct investment firm.  In total, Picard sought approximately $555 million in avoidable transfers.

As covered in an earlier Ponzitracker post, United States District Judge Colleen McMahon agreed last week that Picard's suits against UBS, originally filed in bankruptcy court, were better suited for review by a federal district judge because of non-bankruptcy issues raised in the suits.  This move was widely seen as a blow to Picard's chance of succeeding on the suits, as he had enjoyed continuing success litigating in the United States Bankruptcy Court.  Additionally, recent decisions rejecting similar claims by federal judges out of the Southern District of New York illustrated the uphill battle faced by Picard.

On the same day that Judge McMahon agreed to review the UBS/Luxalpha and UBS/LIF cases, she issued a letter (the "July 14 Letter") to attorneys in the UBS/LIF case questioning whether there were overlapping claims and background between the two lawsuits, and asking the attorneys to clarify that understanding.  Several days later, Mr. Picard apparently provided Judge McMahon with clarification that he intended to withdraw his non-bankruptcy claims in the UBS/LIF suit and that, as a result, the case should remain in the Bankruptcy Court.  These non-bankruptcy claims included several claims for unjust enrichment.  In a July 19th letter, Judge McMahon reiterated that position in a letter to counsel for UBS, requesting a reply as to how the withdrawn claims would affect the case going forward.  Notably, she questions whether "there remain in the LIF case issues of federal law that do not arise under Title 11, and whether there are corresponding jury trial rights as to those issues."

Mr. Picard's change in position yields an takeaway.  By removing non-bankruptcy claims from the UBS/LIF lawsuit, Mr. Picard will now argue that there is no reason for the federal district court to hear the case, as the main argument from UBS in favor of being in federal court is no longer applicable; that is, there no longer remain any non-bankruptcy issues in the UBS/LIF case that are better heard by a federal district judge.  Picard would likely rather to have these issues heard in the bankruptcy court, where he has received a much more favorable reception.  Additionally, while Picard has not shown much interest in settlement with larger banking entities, this tactic may provide some leverage as UBS obviously wanted the issues heard outside of bankruptcy court.  Finally, Judge Jed Rakoff is set to issue a ruling by the end of July whether Picard may bring fraud claims on behalf of investors against banking giants HSBC and Unicredit.  At stake is up to $70 billion in damages sought.



Another excellent analysis of this issue is here.


Mets Owners File Additional Brief in Bid to Dismiss Madoff Trustee's Lawsuit

In a filing July 7, lawyers for New York Mets team president Saul Katz and other team executives submitted additional briefing in support of their previous motion to dismiss Irving Picard's lawsuit. Picard, the court-appointed trustee liquidating Bernard L. Madoff Investment Securities LLC, filed suit in January seeking hundreds of millions of dollars from the Mets owners and team executives, alleging that as sophisticated investors, they had to know that the consistent returns achieved by Madoff could not have been legitimate.  

Unique from the typical clawback lawsuit - which now total over 1,000 - Picard sought not only money withdrawn in excess of invested principal - termed "false profits" - but also the return of 'fraudulent transfers' withdrawn from Madoff into accounts owned or controlled by the executives.  Picard asserted that such an approach was appropriate in light of "certain indicia of fraud by the Sterling Partners.".  Not surprisingly, the Mets executives fired back, lambasting Picard and his team for their overzealous pursuit and pointing to the subsequent financial damage suffered by the Mets organization after the Madoff fraud was exposed.

In their motion to dismiss and subsequent reply in support, the Mets executives seek to refute the many facts alleged by Picard in support of his contention that the defendants knew or should have known of the illegality of Madoff's operation.  Calling Picard's motion without a "factual or legal foundation," the defendants specifically sought to refute several of the allegations, arguing that (1) the Sterling Partners never shopped for Ponzi Scheme Insurance, and (2) Mets executive David Katz was not concerned that Madoff's scheme was a Ponzi scheme.

The issue is now fully briefed, and a hearing will likely be scheduled in the near-future.  However, any hearing will be held in a New York federal court, rather than Bankruptcy Court, after a ruling that the legal issues raised were more suitable to be heard in federal court.  This is seen as an advantage for the Mets defendants, as the Southern District of New York is highly experienced in dealing with such issues.


Secondary Market for Investor Claims Gaining in Popularity

Investors in now-infamous Ponzi Schemes run by those such as Bernard Madoff are now seeing renewed interest by financial institutions interested in buying any rights to proceeds eventually recovered and distributed by the court-appointed receiver or trustee.  These offers essentially represent both an opportunity for an investor to immediately receive a mutually-agreed amount for any future claim to proceeds in the Ponzi scheme and also a bet by the buying financial institution that the recovered proceeds will return an amount greater than for what the investor is willing to part with their claim.

The financial institutions rumored to be bidding for investor claims include Goldman Sachs, Deutsche Bank, UBS, and Royal Bank of Scotland.  Particularly noteworthy is the fact that the latter two are currently embroiled in litigation with the Madoff Trustee, Irving Picard, as a result of their alleged connections with Bernard Madoff Investment Securities, the broker-dealer utilized by Madoff to perpetrate the scheme.  As one commenter has noted, those banks facing litigation from Picard may be seeking to hedge any potential litigation losses by buying claims.  

The prospect of receiving a lump-sum payment in return for relinquishing any legal claim to future proceeds may entice investors who lost a substantial portion of their assets and may not have the financial stability to wait out the lengthy legal process of unraveling the scheme.  Interestingly enough, when the practice first began in early 2010, investors were offered an average of around 20-25 cents on the dollar for their claim to whatever Picard finally recovered.  However, when the estate of Jeffrey Picower settled with Picard in December 2010 for $7 billion and bringing Picard's then-total recovery to $10 billion, the offer to investors shot up to a range of 70% - 75% per allowed claim.  Of course, it goes without saying that those institutions now offering that amount have even more faith that Picard can continue to negotiate hefty settlements.

Additionally, the dynamics of distributions from recovered Ponzi assets may also favor banks in enticing investors to accept these offers.  Because the process of recovering funds is an ongoing procedure and is dependent on the conclusion of pending litigation, distributions are often made on a yearly or bi-yearly basis depending on the availability of funds.  Thus, it is not at all uncommon to have 3-5 distributions over the course of a Receivership, with a final distribution often coinciding with the official conclusion of the process.  The prospect of receiving an up-front payment will particularly appeal to those who are unable to wait out the lengthy process.

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