Anyone who pays a $7.2 billion settlement wants to ensure there will be no more liability. In bankruptcies, the ability of trustees to cut off all conceivable additional liability is limited because, as a general rule, individual creditors remain entitled to assert claims particular to them, such as claims for violations of securities laws.
In the liquidation of Bernard L. Madoff Investment Securities LLC under the Securities Investor Protection Act, the single-largest recovery for victims of the $17.5 billion Ponzi scheme was a $7.2 billion settlement paid by the estate of the late Jeffry Picower. To insulate the Picower parties from further liability, the 2011 settlement agreement, approved on appeal in the Second Circuit, enjoined anyone from bringing suits that were “derivative of” claims the trustee brought “or which could have been brought” by the Madoff trustee.
In an opinion on Feb. 17, Manhattan Bankruptcy Judge Stuart M. Bernstein blocked a third attempt by the A&G Goldman Partnership to “plead around” the Picower settlement injunction.
The Goldman plaintiffs’ third complaint in district court in Florida asserted claims under Section 20(a) of the Securities Exchange Act of 1934 by alleging that Picower was a “control person” of Madoff’s brokerage.
Madoff trustee Irving Picard admitted he does not have standing to assert “control person” claims against Picower. Consequently, the Goldman plaintiffs contended that they were entitled to sue the Picower parties for any losses the Madoff trustee cannot pay.
Even though the Madoff trustee cannot bring Section 20(a) claims, the third effort failed, just like those that came before.
For the same reasons the two prior complaints were barred on appeal in the circuit and district courts, Judge Bernstein said the new complaint was not a bona fide Section 20(a) claim. Instead, he said, it was duplicative or derivative of claims the trustee brought or could have brought.
All of the facts pleaded in the new complaint “were incident to the fraudulent withdrawals of $7.2 billion,” Judge Bernstein said. In the very next paragraph in his 37-page opinion, he said that the actions by Picower alleged in the complaint “indirectly affected all creditors in the same way” and thus were precluded by the 2011 settlement injunction.
Were it in reality a Section 20(a) claim, the result may have been otherwise, but Judge Bernstein said the new complaint had none of the required particularized allegations that Picower ever interacted with customers or controlled information sent to customers.
Near the end of the opinion, Judge Bernstein noted how the Goldman parties’ “largely duplicative pleadings” had caused the trustee to incur “enormous expense.” Although he declined to enjoin them from further litigation, the judge said he was “confident” they “will not cause any further needless expenditures of resources or time.” If they do, Judge Bernstein said the trustee “may seek appropriate sanctions.”