Judge Stuart Bernstein of the U.S. Bankruptcy Court for the Southern District of New Yorkin Manhattan ruled Tuesday that Securities Investor Protection Act trustee Irving H. Picard could claw back money from certain former customers. These "net winners" withdrew more than they deposited into Madoff's securities company (BLMIS), and Picard wants to recover these "fictitious profits" in the Ponzi scheme.
These are limited to intentional fraudulent transfers made in the two years before the securities company went into receivership on Dec. 15, 2008. Proceedings in the case take place in bankruptcy court. The defendants in 233 adversary proceedings had sought to have complaints filed by Picard dismissed.
Bernstein, however, ruled, "Fictitious profits are not profits at all but distributions of other people's money based on an arbitrary allocation of fraudulent bookkeeping entries." He later added, "Once it is determined that a Ponzi scheme exists, all transfers made in furtherance of that Ponzi scheme are presumed to have been made with fraudulent intent."
Picard had filed a motion Friday seeking permission to enter into a deal with two Madoff feeder funds.
Under the terms of the settlement, Ariel Fund would hand over $17.9 million to the BLMIS customer fund, while Gabriel Capital would put $17 million into the fund. That money represents 100% of the amount transferred from BLMIS to the funds. Ariel Fund would receive an allowed claim of about $189.4 million, while Gabriel Capital would receive a $178.4 million claim. A hearing on the matter is set for June 24.
So far, Picard has reached deals to recover about $10.64 billion for former BLMIS customers and doled out more than $7.2 billion to those clients.
The trustee, a Baker & Hostetler partner, on April 15 sought permission to make a sixth pro rata interim distribution from the customer fund to clients with allowed claims. A hearing on the latest payout has been adjourned until July 29.
The Securities Investor Protection Corp., which maintains a special reserve fund authorized by Congress to help investors at failed brokerage firms, announced on Dec. 15, 2008, that it was liquidating BLMIS under the SIPA. The case started in the U.S. District Court for the Southern District of New York in Manhattan before it was transferred to bankruptcy court as an adversary proceeding.
On March 29, 2009, Madoff pleaded guilty to 11 felony charges, including securities fraud, mail fraud, wire fraud, investment adviser fraud and money laundering, among others. U.S. District Court Judge Dennis Chin on June 29, 2009, sentenced Madoff to 150 years in prison.
A call to Picard's office was directed to his spokeswoman, Amanda Remus, who could not immediately be reached for comment Wednesday.