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From Securities Regulation Daily, June 22, 2015

High court denies Madoff trustee’s cert petition to claw back earlier withdrawals

By Amanda Maine, J.D.

The bankruptcy trustee for Bernard L. Madoff Investment Securities (BLMIS) was dealt a blow today by the U.S. Supreme Court, which denied certiorari to a petition urging reconsideration of the Second Circuit’s decision dismissing the trustee’s request to “claw back” money paid to BLMIS investors who withdraw money prior to the discovery of Madoff’s massive Ponzi scheme (Picard v. Ida Fishman Revocable Trust, June 22, 2015).

Trustee’s argument. Irving H. Picard was appointed bankruptcy trustee for BLMIS following the discovery and subsequent collapse of Madoff’s Ponzi scheme. Under the Securities Investor Protection Act (SIPA), Picard was empowered to recover certain funds paid out by BLMIS. Picard sought to claw back money from BLMIS customers who were able to take out more money than they had invested with BLMIS before the fraud was discovered.

Lower and appellate court rulings. The defendants from whom claw back funds were sought argued that under Bankruptcy Code Section 546(e), they were entitled to protection because transfers made by a stockbroker “in connection with a securities contract” cannot be voided in bankruptcy. The Southern District of New York sided with the defendants, finding that the payments from BLMIS to customers were shielded by this provision. The Second Circuit affirmed the decision of the lower court, stating that the fraudulent conduct of BLMIS did not negate the pre-existing customer contracts. The subsequent customer withdrawals were related to a “securities contract” under the Bankruptcy Code and were not subject to be recovered by the bankruptcy trustee.

Cert denied. Picard’s petition, joined by the Securities Investor Protection Corporation (SIPC), urged the Supreme Court to reconsider the lower courts’ interpretation of  Section 546(e), including whether it applies to protect payments involving fictitious securities transactions and whether  that application is consistent with SIPA. The petition also cited the legislative history of SIPA in support of its argument that Congress did not intend such a broad sweep of the definitions therein. In addition, the petition contended that the lower courts’ interpretation of Section 546(e) results in the inequitable treatment of investors. Under this interpretation, earlier investors benefit at the expense of later investors, “while perpetuating and giving life and legitimacy to the fraud that gave rise to the inequality in the first place,” the petitioners argued.

In a court order dated Monday, June 22, 2015, the Supreme Court allowed several parties, including the National Association of Bankruptcy Trustees and several academics, to formally file amicus briefs.  The same order, however, denied the petition for certiorari.

The case is No. 14-1129.

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