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.