The Supreme Court will not review a decision in the Madoff liquidation where the Second Circuit held that Sections 548 and 550 enable the trustee to sue foreign defendants for the recovery of fraudulent transfers, even if subsequent transfers occurred abroad.
The action by the Supreme Court on June 1 is important for the 2,600 customers who were defrauded by Bernard Madoff in his $17 billion Ponzi scheme. The denial of certiorari allows the Madoff trustee to revive almost 90 avoidance actions where the trustee will be seeking some $3.2 billion, before prejudgment interest.
The Madoff trustee, Irving Picard, has already recovered $14.3 billion and has made distributions representing about 70% of the cash that customers invested. He is holding $1 billion in cash toward future distributions.
The revivified lawsuits may permit the trustee to realize additional recoveries and settlements that could bring the recovery to 100% of customers’ cash losses. The Madoff firm is being liquidated in bankruptcy court in New York under the Securities Investor Protection Act, which incorporates large swaths of the Bankruptcy Code, including the avoiding powers.
Josephine Wang, the president and chief executive of the Securities Investor Protection Corp., told ABI that the “Second Circuit’s decision sends an important message: to those who seek to divest the U.S. court of jurisdiction by unlawfully taking customer money out of a U.S. bank account and sending it abroad, your efforts will fail.”
Wang added, “This is a good day for investors.”
The Trustee’s Victory in the Second Circuit
District Judge Jed Rakoff withdrew the reference of hundreds of lawsuits to the bankruptcy court where the Madoff trustee was suing to recover fictitious profits that Madoff paid to so-called net winners, meaning investors who had taken more cash out of the Ponzi scheme than they had invested. Among other controversial decisions, Judge Rakoff ruled in July 2014 that Section 550 does not permit recovering from a subsequent foreign recipient of stolen funds, given comity and the presumption against extraterritorial application of U.S. statutes.
Judge Rakoff sent the case back to the bankruptcy judge, who was required eventually to dismiss lawsuits where Madoff had paid out stolen funds to offshore feeder funds. The feeder funds in turn distributed the cash to their supposedly foreign investors.
The Second Circuit reversed in February 2019. See In re Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, 917 F.3d 85 (2d Cir. Feb. 25, 2019). To read ABI’s report about the Second Circuit decision, click here.
On the question of whether Sections 548 and 550 apply extraterritorially, the Second Circuit held that the relevant transfer was not foreign. Rather, the trustee was seeking to recover a fraudulent transfer that emanated in the U.S. from a Madoff account in New York. The appeals court did not buy the idea that the fraudulent transfer escaped the tentacles of a U.S. court just because the initial recipient was abroad and in turn transferred the stolen money to another foreign entity.
Picking up on an argument made by the Madoff trustee, the Second Circuit said it was closing a “loophole,” because the district court’s precedent would enable a fraudster to transfer property to a “foreign entity,” thereby rendering the “property recovery-proof.” Id. at 100.
The Certiorari Petition
With the looming reinstatement of lawsuits against them, defendants filed a petition for certiorari in August. HSBC Holdings PLC v. Picard, 19-277 (Sup. Ct.). The Madoff trustee responded at the end of October, opposing certiorari because there is no circuit split. The justices of the Supreme Court considered the certiorari petition at a conference on December 6 and asked the U.S. Solicitor General “to file a brief . . . expressing the views of the United States” about the merits of granting certiorari.
In the brief filed on April 10, the Solicitor General expressed his opinion that the Second Circuit correctly ruled on the issue and that there is no split of circuits. He therefore recommended that the Court deny the certiorari petition. The Solicitor General even said that “the large dollar amounts at issue here provide no sound basis for this Court’s review.”
Having received the opinion of the Solicitor General, the justices considered the certiorari petition at a conference on May 28. The following Monday, June 1, the Court denied the petition. As is typical, the justices did not give reasons for declining to recover the case.
To read the Solicitor General’s brief, click here.
The Supreme Court will not review a decision in the Madoff liquidation where the Second Circuit held that Sections 548 and 550 enable the trustee to sue foreign defendants for the recovery of fraudulent transfers, even if subsequent transfers occurred abroad.
The action by the Supreme Court on June 1 is important for the 2,600 customers who were defrauded by Bernard Madoff in his $17 billion Ponzi scheme. The denial of certiorari allows the Madoff trustee to revive almost 90 avoidance actions where the trustee will be seeking some $3.2 billion, before prejudgment interest.
The Madoff trustee, Irving Picard, has already recovered $14.3 billion and has made distributions representing about 70% of the cash that customers invested. He is holding $1 billion in cash toward future distributions.
The revivified lawsuits may permit the trustee to realize additional recoveries and settlements that could bring the recovery to 100% of customers’ cash losses. The Madoff firm is being liquidated in bankruptcy court in New York under the Securities Investor Protection Act, which incorporates large swaths of the Bankruptcy Code, including the avoiding powers.
Josephine Wang, the president and chief executive of the Securities Investor Protection Corp., told ABI that the “Second Circuit’s decision sends an important message: to those who seek to divest the U.S. court of jurisdiction by unlawfully taking customer money out of a U.S. bank account and sending it abroad, your efforts will fail.”
Wang added, “This is a good day for investors.”