After 12 Losses, Will Madoff Customers Stop Pursuing Claims Belonging to the Estate?

“Winners never quit” is an adage to inspire young athletes, but in litigation, it can be a risky philosophy.

As the result of a March 19 opinion by District Judge Vernon S. Broderick of New York, the bankruptcy court, district courts, and the Second Circuit have now written 12 opinions, all holding that creditors of Bernard Madoff on their own cannot sue based on facts that caused damage to all creditors alike, even when the creditors base their suit on a theory of liability not available to the trustee.

The litigations all arose in the liquidation of the Bernard Madoff Ponzi scheme, commenced in 2008 under the Securities Investor Protection Act. In 2011, the Madoff Trustee, Irving Picard, negotiated a $7.2 billion settlement with the estate of the late Jeffry Picower to resolve fraudulent transfer claims. The trustee had alleged, in substance, that Picower knew about the fraud all along and withdrew funds from his Madoff account that had been stolen from other customers.

To ensure that the Picower parties would not end up paying creditors a second time, the 2011 settlement enjoined anyone from bringing suits that were “derivative of” claims the trustee brought “or which could have been brought” by the Madoff trustee. On appeal years ago, the Second Circuit upheld the settlement and the injunction.

The Madoff liquidation has been remarkably successful. To date, the Madoff trustee has made settlements or recoveries totaling about $13.4 billion toward customers’ claims of more than $17.6 billion.

Nonetheless, two groups of Madoff customers have mounted lawsuits hoping to “plead around” the settlement injunction and sue Picower on their own. Of recent vintage, the customers attempted to bring claims under Section 20(a) of the Securities Exchange Act of 1934 based on allegations that Picower was a “control person” of Madoff’s brokerage. The theory was based on the Madoff trustee’s concession that he did not have standing to bring Section 20(a) claims.

The Section 20(a) claims fared no better than their predecessors. Judge Broderick said that judges on three levels had written 11 opinions, all “concluding that the permanent injunction” bars the suits brought by the customers in both groups. He said that the courts “have uniformly concluded that each successive version . . . of the complaints merely assert[s] claims that are duplicative or derivative of claims brought by the [Madoff] Trustee.”

The lawsuit before Judge Broderick began in 2015 after two prior versions of the complaint were thrown out. The bankruptcy judge dismissed the newest iteration of the suit in March 2107, prompting the customers to appeal. While the appeal was pending, the Second Circuit upheld dismissal of a companion lawsuit in June 2018 that had been brought by the other group of Madoff customers. To read ABI’s report on the Second Circuit opinion, click here.

Judge Broderick said that the allegations in the complaint before him “were copied, almost verbatim, from earlier iterations . . . , each of which was barred by the permanent injunction.” In addition, he said, the new allegations mostly “mirror those allegations” in the companion suit where the Second Circuit upheld dismissal.

Judge Broderick upheld dismissal “because the instant appeal involves a parallel group of former [Madoff] customers who have set forth” allegations that are “virtually identical” to those where the Second Circuit upheld dismissal last year.

If the customers take an appeal to the Second Circuit from Judge Broderick’s ruling, one wonders whether the appeals court will impose sanctions for taking a frivolous appeal.