Net Equity – June 25, 2012
Under the Trustee’s Net Investment Method, a customer’s net equity is calculated by crediting the amount of cash deposited by the customer into his BLMIS account, less any amounts already withdrawn from that BLMIS customer account. Conversely, some claimants argued that Net Equity should be based on the value of the securities reflected in the November 2008 BLMIS account statements.
On August 16, 2011, the Second Circuit upheld the Bankruptcy Court’s approval of the Net Investment Method, affirming that the Net Investment Method is appropriate for calculating the net equity of a BLMIS customer’s account and rejecting the use of the fictitious November 2008 BLMIS account statements in determining the value of claims. In other words, the Trustee’s Net Investment Method is the formula for determining eligibility for pro rata distributions to BLMIS customers with allowed claims from the Customer Fund, based on “cash-in, cash-out” of BLMIS. See Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229, 241 (2d Cir. 2011). Click here to read decision
The claimants filed petitions for writs of certiorari with the United States Supreme Court. On June 25, 2012, the Supreme Court declined to review the petitions, ending the appeals process regarding the Net Equity issue.
Customer Definition – February 22, 2013
The Trustee’s consistent position has been that only those claimants who maintained an account at BLMIS are “customers” of BLMIS, as defined in the Securities Investor Protection Act (“SIPA”). Many claimants did not open accounts directly at BLMIS; instead, they invested in feeder funds, which then opened accounts at BLMIS.
On February 22, 2013, the Second Circuit affirmed the decisions of the District and Bankruptcy Courts, holding that certain BLMIS investors – those who invested in feeder funds with accounts at BLMIS – did not qualify as “customers” under SIPA. Further, the Second Circuit clarified that only investors who invested directly by holding BLMIS accounts in their own names qualified as “customers” under SIPA. See Kruse v. Sec. Investor Prot. Corp., Irving H. Picard, 708 F.3d 422 (2d Cir. 2013). Click here to read decision
No petitions for writs of certiorari to the Supreme Court were filed, ending the appeals process.
Antecedent Debt – October 15, 2013
The District Court considered whether the Trustee’s claims against certain defendants should be dismissed in light of the defendants’ argument that they gave value in exchange for the transfers they received.
On October 15, 2013, the District Court ruled that the Trustee’s avoidance claims against certain defendants should not be dismissed, stating that claims against the general BLMIS estate do not constitute antecedent debts and do not create “value” within the meaning of section 548(c) of the Bankruptcy Code. Further, the Court held that inter-account transfers of amounts exceeding principal in the account of the transferor continue to be fictitious profits, not principal, in the account of the recipient. See Sec. Inv’r Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 499 B.R. 416 (S.D.N.Y. 2013). Click here to read decision
Section 550(a)/Subsequent Transferees – October 29, 2013
The Trustee brought recovery actions against feeder funds, as well as those who received transfers of customer property from the feeder funds (the “Subsequent Transferees”). In these actions, the Trustee alleged that the feeder funds received avoidable initial transfers of customer property from BLMIS, the feeder funds transferred the initial transfers to the Subsequent Transferees, and those amounts were recoverable under section 550(a) of the Bankruptcy Code.
The issue was whether section 550(a)’s limitation on the Trustee’s recovery of transfers “to the extent that a transfer is avoided” requires the Trustee to obtain an actual, adjudicated judgment of avoidance, or whether it merely required him to prove in a recovery action that the transfer he seeks to claw back is avoidable. The District Court held that section 550(a) requires the Trustee to show that a given transfer is avoidable and does not require an actual judgment of avoidance. See Sec. Inv’r Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 501 B.R. 26 (S.D.N.Y. 2013). Click here to read decision
Time-Based Damages – October 5, 2015
Under the Net Investment Method, customer claims for net equity are limited to the “cash in/cash out” amount. But some claimants asserted that they were entitled to an inflation or interest adjustment on their claims. The Trustee’s position was that customers were not entitled to an inflation-based adjustment to their allowed customer claims. On February 20, 2015, the Second Circuit affirmed the Bankruptcy Court’s decision, holding that claimants in the SIPA liquidation of BLMIS are not entitled to any interest or inflation adjustments on money deposited at BLMIS. See In re Bernard L. Madoff Inv. Sec. LLC, 779 F.3d 74, 80, 82 (2d Cir. 2015). Click here to read decision
The defendants filed a petition for a writ of certiorari with the United States Supreme Court, and on October 5, 2015, the Supreme Court declined to review the petition, ending the appeals process.
Inter-Account Transfers – June 1, 2017
The question arose as to how to value the net equity of transfers between BLMIS accounts (“Inter-Account Transfers”).
To calculate net equity following an Inter-Account Transfer, in which no new funds entered BLMIS, the Trustee gave credit only for the amount of principal available in the transferor account to be transferred; credit was not given for fictitious profits. If the transferor BLMIS account did not have any principal available at the time of the transfer, then $0 was credited to the transferee BLMIS account.
On June 1, 2017, the Second Circuit issued a Summary Order affirming the District Court’s order upholding the Trustee’s application of the Net Investment Method to Inter-Account Transfers. See In re Bernard L. Madoff Inv. Sec., LLC, 16-413-bk(L), 2017 WL 2376567, *3 (2d Cir. Jun. 1, 2017). Click here to read decision
No petitions for writs of certiorari to the Supreme Court were filed, ending the appeals process.
Profit Withdrawal – October 6, 2020
Several hundred BLMIS account statements contained the notation “PW”, or “Profit Withdrawals.” The Trustee treated “PW” transactions as cash withdrawals for the purposes of determining a customer’s net equity. After a trial before the Bankruptcy Court, the Trustee’s treatment of PW transactions as debits was upheld on July 27, 2018. See Sec. Inv’r Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 592 B.R. 513 (Bankr. SDNY 2018). Click here to read decision
Claimants appealed the decision to the District Court. The District Court affirmed the ruling of the Bankruptcy Court on August 16, 2019. See Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 2019 WL 3886721 (S.D.N.Y Aug. 16, 2019).
On September 13, 2019, an appeal of the District Court’s decision was taken to the Second Circuit. The appellants filed their opening brief on December 27, 2019. The Trustee’s and SIPC’s oppositions were filed with the Second Circuit on April 17, 2020, and appellants filed their reply on May 27, 2020. On June 26, 2020, the Second Circuit set oOral argument was held on for the week of September 21, 2020.
On October 6, 2020, the Second Circuit issued its Summary Order upholding the District Court’s judgment affirming the Bankruptcy Court’s decision that the Trustee properly treated PW transactions as debits to BLMIS customer accounts. The Court also upheld the admission of BLMIS records into evidence. Summary Order, In re: Bernard L. Madoff Investment Securities LLC, No. 19-2988-bk (2d Cir. Oct. 6, 2020). Click here to read decision
No petitions for certiorari were filed.
Extraterritoriality – June 1, 2020
On February 25, 2019, the Second Circuit reversed two rulings by the lower courts that prevented the Trustee from recovering funds stolen by Madoff and subsequently transferred overseas.
The Second Circuit held that neither the presumption against extraterritoriality nor principles of international comity limit the reach of section 550(a)(2) of the Bankruptcy Code, enabling the Trustee to use it to recover property from a foreign subsequent transferee that received the property from a foreign initial transferee. See In re Picard, Tr. for Liquidation of Bernard L. Madoff Inv. Sec. LLC, No. 17-2992 (L), 2019 WL 903978 (2d Cir. Feb. 25, 2019). Click here to read decision
The decision allows the Trustee’s legal team to target approximately $3.5 billion that was withdrawn from BLMIS by its feeder funds, who then redistributed that money to their foreign managers and investors.
The defendants filed a Petition for Rehearing and Rehearing En Banc on March 11, 2019. The Second Circuit denied the Petition on April 3, 2019.
The defendants then sought a stay of the mandate pending the Supreme Court’s disposition of their impending petition for a writ of certiorari. The Trustee opposed that motion on April 18, 2019. The Second Circuit entered an order granting the defendants’ motion to stay the mandate on April 23, 2019.
The defendants filed a petition for a writ of certiorari in the United States Supreme Court on August 29, 2019. The Trustee filed a brief in opposition to the defendants’ petition on October 30, 2019, and the defendants filed their reply brief on November 14, 2019.
In December 2019, the Supreme Court invited the Solicitor General to file a brief expressing the views of the United States. On April 10, 2020, the Solicitor General filed a brief recommending that the Supreme Court deny the petition. On June 1, 2020, the Supreme Court denied the defendants’ petition, ending the appeals process.
“For Value” Defense – May 3, 2021
The Trustee filed over one thousand lawsuits to recover funds received by BLMIS customers in excess of their principal investment pursuant to the fraudulent transfer provisions of section 548 and 550 of the Bankruptcy Code.
Certain good faith investor defendants argued that they were entitled to retain the transfers pursuant to an affirmative defense provided for in section 548(c) of the Bankruptcy Code, which permits a transferee who takes an interest of the debtor in property “for value and in good faith” to retain the transfer to the extent of the value given. The defendants’ good faith was not in dispute; the issue was whether the transfers of funds to them by BLMIS were “for value.” The defendants argued that they gave value for the transfers in the following ways: (1) they had a right to the value of the enforceable obligations on their statements under the UCC and the Second Circuit’s 546(e) opinion, and (2) value rose from tort claims against BLMIS that give rise to an antecedent debt. They also argued that the fraudulent transfer statute bars the Trustee from recovering because it limits a trustee’s reach to only those transfers made within the two years prior to the filing of a bankruptcy petition.
Following a report and recommendation by the Bankruptcy Court, the District Court adopted the report and recommendation and entered judgment against the defendants. The District Court held that the affirmative defense of value in section 548(c) did not apply to shield transfers of fictitious profits. An appeal was taken to the Second Circuit.
On September 24, 2020, the Second Circuit affirmed the District Court’s judgment, ruling that investors cannot give value for fictitious profits received in a Ponzi scheme. The Second Circuit concluded that to the extent section 548(c) applies in this liquidation under the Securities Investor Protection Act, the transfers were not “for value” for purposes of that provision, and that recovery would not violate the two-year limitation in section 548(a)(1). See In re Bernard L. Madoff Inv. Sec. LLC, No. 19-0429-BK(L), 2020 WL 5666677 (2d Cir. Sept. 24, 2020). Click here to read decision
On October 8, 2020, the defendants filed a petition for panel rehearing, or in the alternative, for rehearing en banc with respect to the Second Circuit’s September 24 opinion. On November 16, 2020, that request was denied. On November 23, 2020, the Second Circuit issued its judgment mandate, affirming the judgment of the District Court.
On March 30, 2021, the defendants filed a petition for a writ of certiorari before the Supreme Court. On May 3, 2021, the Supreme Court denied the defendants’ petition.
The denial allowed the SIPA Trustee’s legal team to collect approximately $41 million in fraudulent transfers that was withdrawn from BLMIS by the defendants.