Madoff Trustee Set to Make Initial $312 Million Distribution to Victims on Wednesday

Victims of Bernard Madoff's massive Ponzi scheme are set to receive their first distribution of funds recovered in the wake of the fraud on Wednesday, five days after the initial distribution date was delayed.  Irving Picard, the court-appointed trustee, had originally intended to make the distribution by September 30th to investors holding claims as of September 15th.  However, the distribution was delayed after a federal judge dismissed most of Picard's claims against several owners of the New York Mets last week.  Along with the dismissal of nearly all of Picard's claims, United States District Judge Jed S. Rakoff also made several rulings that could potentially threaten the magnitude of any future recoveries in the approximately 1,000 cases filed by Picard thus far. Ponzitracker covered Judge Rakoff's ruling in greater detail here.  In a statement late last week, Picard announced that out of an abundance of caution, his legal team was delaying the scheduled distribution to evaluate the impact of the rulings.

The majority of lawsuits filed by Picard have sought to "claw back" false profits from investors who withdrew more funds than they invested with Madoff.  Based partly in equity, this procedure seeks to pool all recovered funds and make pro rata distributions to all investors, rather than allowing some investors, usually those that were able to invest in the scheme earlier on, to keep their profits while ignoring others who had invested later and had not received as many purported interest payments to offset their principal investment losses.  Because of the duration of Madoff's scheme, which Picard argues spanned several decades, thousands of investors had accounts with Madoff.  Some who were fortunate to invest in the early days of the scheme have since recouped their original investment by many times.  Picard's largest single recovery to date comes from the estate of one of these early investors, Jeffrey Picower, who agreed to return over $7 billion of false profits received during his relationship with Madoff.  

In the ruling last week, Judge Rakoff dismissed nearly all of Picard's claims asserted against several principals of the New York Mets.  Picard had taken the rare step of not only asking for any false profits, but also for the return of the original principal investment, arguing that the mens' close relationship with Madoff and investing knowledge should have alerted them to the fraud.  Judge Rakoff's ruling severely limited Picard's reach, holding that a "Safe harbor" provision in the U.S. Bankruptcy Code forbade Picard from seeking any false profits received over two years from the date Madoff's brokerage filed for bankruptcy.  This safe harbor provision restricts a bankruptcy trustee's power to recover payments that are otherwise avoidable under the Bankruptcy Code, and represents the interplay between bankruptcy and securities law.  While Picard had argued that the "safe harbor" provision did not apply, Judge Rakoff held otherwise.  

In his statement issued today, Picard stated that additional settlements had allowed him to increase the amount of the initial distribution from $272 million to $312 million.  This distribution would account for roughly 4.6% of allowed investor losses.  Picard also stated that the total funds recovered for victims thus far had increased to $8.694 billion - approximately 50% of the $17.3 billion amount Picard had estimated was lost by Madoff's victims.  Of the nearly $2.4 billion available for distribution, most remains tied up by pending litigation.  

Investors with allowed claims have also received over $700 million in total cash advances from the Securities Investor Protection Corporation ("SIPC"), a federally-mandated non-profit that protects investors if a broker-dealer fails.  Nearly all broker-dealers registered with the Securities and Exchange Commission are members of SIPC.  Under SIPC guidelines, investors holding securities or cash in accounts of failed broker-dealers are entitled to receive up to $500,000 in cash advances to cover their losses.

A copy of the Statement issued today by the Trustee is here.

Ruling Limits Liability of Madoff 'Net Winners'; Interim Distribution to be Delayed?

Irving Picard, the trustee appointed to liquidate the now-defunct brokerage firm of convicted Ponzi schemer Bernard Madoff, was dealt yet another significant setback in his quest to collect funds for distribution to Madoff's defrauded investors.  On Tuesday, a federal judge rejected many of the claims in Picard's ongoing suit seeking $1 billion from owners of the New York Mets baseball team.  In addition to the dismissal of nearly all claims, United States District Judge Jed S. Rakoff narrowed the standard under which Picard could proceed in the case going forward.  Additionally, in the wake of the ruling, which many observers warned could severely limit Picard's potential recovery in the nearly 1,000 cases he has filed against those who withdrew more than they invested with Madoff, a lawyer for Picard stated that the first interim payment scheduled to be distributed to investors this month could likely be delayed.

In his suit, Picard had sought nearly $1 billion from various executives of the New York Mets baseball club, consisting of $300 million in principal investment and $700 million in so-called false profits. Consistent with the nearly 1,000 cases filed to date by Picard, the majority of which are the "clawback" actions, Picard has sought the return of funds withdrawn by the aptly-named net-winners within the six years prior to the filing date of the Madoff bankruptcy.  While federal bankruptcy laws only permit this lookback to seek funds withdrawn up to two years before the bankruptcy filing date, Picard has relied on the interplay between federal and state bankruptcy laws, which often permit a longer lookback period. Section  544(b) of the Bankruptcy Code defines this interplay, stating that the applicable state law can also be considered in expanding this lookback period.  Under section 213(8) of the New York Debtor and Creditor Law, fraudulent transfers can be avoided if they occurred within six years of the bankruptcy filing.

Under most bankruptcies and receiverships that parallel bankruptcy law, the use of state law to enlarge the applicable lookback period is routinely used and rarely challenged.  However, Judge Rakoff relies on the "safe harbor" provision codified in section 546(e) of the Bankruptcy Code that comes into play in the case of a registered securities brokerage firm and securities contracts.  This safe harbor restricts a bankruptcy trustee's power to recover payments that are otherwise avoidable under the Bankruptcy Code, and represents "the intersection of two important national legislative policies on a collision course - the policies of bankruptcy and securities law." In re Enron Creditors Recovery Corp., 2011 WL 2536101, *5 (2d Cir. June 28, 2011).  Section 546(e) covers an extremely broad definition of "settlement payments", which Judge Rakoff likens to a transfer made in connection with a securities contract, and "clearly includes all payments made by Madoff Securities to its customers."  Thus, by its "literal language," the Bankruptcy Code prohibits Picard from bringing any clawback action against Madoff customers except those paid in the case of actual fraud. 

Understandably, Picard argued that section 546(e) was inapplicable in the present situation, since its application would be inconsistent with the statute's purpose.  However, Judge Rakoff cites the purpose of section 546(e) in seeking to "minimize the displacement caused in the commodities and securities markets in the event of a major bankruptcy affecting those industries."  Here, Judge Rakoff relies on Picard's own characterization of the extent of Madoff's fraud in theorizing that the undoing of the transfers involving nearly 5,000 Madoff customers would have a substantial and similarly negative effect on the financial markets.  

However, it is the disparity between the current situation and the context in which that reasoning was previously invoked, the Enron fraud, that may serve as ammunition for the trustee's appeal.  Whereas Enron involved publicly traded shares of stock, which play a direct role in the interplay of the financial markets, Madoff customers invested in a private brokerage firm that was neither publicly traded nor a prominent market participant. The unwinding of transfers to potentially millions of Enron shareholders would have involved a complicated intertwining of numerous market participants.  Some will argue that the sheer volume of Madoff's purported trading qualifies it as a major participant in financial markets, but that purported trading, according to the trustee's extensive analysis of Madoff's business records, was as fictitious as the returns supposedly being generated.  But Judge Rakoff also bolsters his opinion using the constitutional principles of checks and balance by stating that, regardless of the legislative history, the judicial branch must only interpret what Congress has said, and may not deviate from what Congress clearly states.

The decision, arguably the most important legal decision in recent memory by Judge Rakoff, has immediate and severe ramifications for Picard.  Just as seen in the wake of Judge Rakoff's decision dismissing common law claims against HSBC, after which a plethora of 'piggback' motions were filed by similarly-situated financial institutions, one can expect the targets of Picard's current clawback suits to file motions on a much larger scale seeking the limiting of Picard's reach.  This limiting would be significant, in that it would effectively permit Picard to only seek funds withdrawn from Madoff in the two, rather than six, years prior to the unraveling of the scheme.  While many have struggled to estimate the true scope of these two scenarios, a lawyer for Picard estimated that up to $6 billion could be off the table if the ruling is upheld.  As noted by Allison Frankel in her excellent column, some high-profile beneficiaries of such a scenario would include Madoff's children, whose liability would decrease by $83.3 million, Bank Medici founder Sonja Kohn, whose clawback exposure would decrease by $27 million, and Frank Avellino and Michael Bienes, several principals behind a large feeder firm to Madoff, whose clawback liability would decrease by nearly $40 million.

Under an order issued the following day by Judge Rakoff, the decision cuts the possible liability of the Wilpons from nearly $1 billion to $386 million,  the total of all transfers made during the two-year period prior to the filing of the bankruptcy petition.

The ruling also affects the scheduled interim first distribution to victims scheduled to occur by the end of September.  According to Diana B. Henriques of the New York Times, who has authored a book on Madoff, an attorney for Picard stated that the initial distribution to victims would likely be delayed until the trustee has had an opportunity to determine the impact of the ruling on amounts owed to other victims of the fraud.  Victims were scheduled to share a pro rata portion of the first payment, which totaled $272 million.  

An attorney for Picard has already sought permission from Judge Rakoff to allow expedited review of the decision by the Second Circuit Court of Appeals. 

A copy of the Tuesday ruling is here.

A copy of the Wednesday order is here.

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's Disagreement With HSBC Ruling Takes Center Stage in Response to JP Morgan Motion to Dismiss

"Without arguing the Trustee’s appeal in this case, the Trustee respectfully submits that the HSBC decision is unsound in multiple respects and should not be followed by this Court."

Late this past week, the trustee appointed to recover funds for the benefit of investors defrauded by Bernard Madoff's massive Ponzi scheme filed his response to an effort by JP Morgan ("JPM") to dismiss a suit seeking billions in damages for JPM's alleged role in the scheme. In the amended complaint filed in June, Irving Picard tripled the amount sought from JP Morgan from $5.4 billion to nearly $20 billion based on JPM's willingness 

to assist in the daily operation of a Ponzi scheme on an unprecedented scale: to routinely enable billions of dollars to bounce back and forth between BLMIS and its customers with an evident lack of legitimate business purpose, to overlook the lack of securities trading, to decline to inquire into or report fictitious account activity, and to cloak the whole enterprise in the respectability of a renowned financial institution. 

In his 168-page opposition to JPM's Motion to Dismiss, Picard makes several arguments in response to JPM's claims, including (1) that Picard has standing under SIPA and the Bankruptcy Code to bring a contribution claim, (2) that Picard has standing to stand in the shoes of a judgment creditor and assert common law claims, (3) that Picard has sufficient standing as bailee and subrogee to bring common law claims, (4) that Wagoner and the doctrine of in Pari Delicto are inapplicable to his claims, (5) that Picard's claims are not barred by the Securities Litigation Uniform Standards Act, (6) that Picard has sufficiently pled each cause of action under which he is proceeding against JPM, and (7) the specific transfers sought to be avoided are in fact avoidable.  Many of the issues are hardly new to Picard, who has faced steady opposition in his quest to recover damages outside the "comfort zone" of bankruptcy clawback suits and settlements with various feeder funds.  Both UBS and HSBC, among other banking institutions facing similar suits from Picard, have asserted some form of these arguments in their efforts to win dismissal.  

But it is not Picard's latest legal wrangling with these issues that stands out in this filing.  Instead, perhaps most notable is the fact that it is one of the first substantive filings since Judge Rakoff's ruling that Picard lacked standing to assert the same common law claims against HSBC - potentially erasing $9 billion in prospective damages for Madoff's victims. And while Picard appealed that ruling to the Second Circuit Court of Appeals several days ago, he lays out his discontent with Judge Rakoff's ruling in this filing.  

The focal point of Picard's discontent lies in the differing interpretations of the standing conferred on a trustee proceeding under the authority of the Securities Investor Protection Act ("SIPA") or the Bankruptcy Code.  The term "standing" refers to the ability of a party to show a sufficient connection to and harm from the matters at issue to justify that party's involvement in the case.  Such an issue has been hotly contested in the forum of court-appointed receivership and bankruptcy proceedings, where often the most common claims pursued by the receiver or trustee are on behalf of the class of defrauded victims.  

Perhaps luckily for Picard, Judge Rakoff is not overseeing the suit against JP Morgan.  Instead, the suit is before United States District Court Judge Colleen McMahon.  In accordance with the Federal Rules of Civil procedure, JP Morgan will now have an opportunity to file a Reply to Picard's Response.

A Copy of Picard's Amended Complaint against JP Morgan is here.

A Copy of Picard's Response 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.