The Ongoing Madoff Bankruptcy Litigation
Under the Securities Investor Protection Act
In re Bernard L. Madoff Investment Securities LLC,
Adv. Pro. No. 08-01789 (Bankr. S.D.N.Y.)
© Copyright 2014 by K&L Gates LLP. All rights reserved.
PRESENTERS
Richard A. Kirby
Partner
richard.kirby@klgates.com
PH: 202.661.3730
Laura K. Clinton
Partner
laura.clinton@klgates.com
PH: 206.370.7808
D. Matthew Doden
Associate
matt.doden@klgates.com
PH: 206.370.7660
Richard A. Kirby is a securities litigation and government enforcement partner in K&L
Gates’ Washington D.C. office. He has more than two decades of experience in private
practice representing persons involved in Securities and Exchange Commission
(“SEC”), Justice Department, state and self-regulatory organization enforcement
investigations. Prior to joining K&L Gates, Richard served in the Office of the General
Counsel of the SEC, where he briefed and argued more than 50 major securities cases
throughout the country and before almost every federal Circuit Court. Richard has
particular knowledge of workouts arising from Ponzi schemes, having worked on some
of the highest profile cases in the nation. Richard leads the securities litigation team on
Madoff Securities matters handled at K&L Gates, which represents dozens of victims of
the Madoff Ponzi scheme.
Laura K. Clinton is a partner in K&L Gates’ Seattle office. Her practice focuses on
securities issues and complex commercial litigation, and she defends both corporate
and individual clients in securities actions before the federal courts and FINRA. Laura
oversees much of the Madoff litigation handled by K&L Gates.
D. Matthew Doden is an associate in K&L Gates’ Seattle office. His practice focuses on
securities litigation and complex commercial disputes. He has had primary responsibility
for coordinating the efforts of those clients filing claims against the government
remission fund, the Madoff Victim Fund.
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WHAT IS A PONZI SCHEME?
A Ponzi scheme “is a fraudulent investment scheme in which money contributed by later investors is used to pay artificially high
dividends to the original investors, creating an illusion of profitability, thus attracting new investors.” Ades–Berg Investors v. Breeden
(In re The Bennett Funding Group, Inc.), 439 F.3d 155, 157 n. 2 (2d Cir.2006) (citing Black's Law Dictionary 1198 (8th ed. 2004)).
WITHDRAWALS
DEPOSITS
Monthly
Statement
Apple…………….
IBM………………
Enron…………..
Amazon……….
Coca-Cola…..
REITs…………..
Microsoft…..
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SIGNIFICANT PONZI SCHEMES IN THE
NATION AND REGION
Bayou Hedge Fund Ponzi Scheme (1996-2004)
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$450 million
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Bayou hedge funds were founded by Samuel Israel III, with assets held at an affiliated broker-dealer.
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Funds started legitimately but quickly turned to fraud when managers couldn’t generate return.
Tom Petters Ponzi Scheme (1998-2008)
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$3.65 billion
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Petters created three investment funds to finance his big box stores and other acquisitions. He then fabricated
retail orders from those acquisitions and used them as collateral to borrow more money through the funds.
Stanford Ponzi Scheme (1990s-2009)
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$7 billion
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Claimed his CDs were safer than US government-issued accounts while falsifying bank statements to show
higher-than-market returns.
Nevin Shapiro Ponzi Scheme (2005-2009)

$930 million
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University of Miami booster, Nevin Shapiro, started Capital Investments USA, which he claimed bought wholesale
groceries and shipped them to more expensive markets.

Funds from Capital Investments USA were actually diverted for Shapiro’s personal use.
Meridian Real Estate Funds Ponzi Scheme (2002-2012)
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$130 million (largest Ponzi scheme in the Pacific Northwest)
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Frederick Darren Berg founded the funds.
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Berg offered purported investments in seller-financed real estate that were immune from the declining real estate
market, but funds were actually diverted to other ventures such as a high-end motor coach company.
Bernard L. Madoff Investment Securities Ponzi Scheme (1980s?-2008)
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$18 billion
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Details to follow . . .
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INEVITABLY, PONZI SCHEMES WILL FAIL
WITHDRAWALS
DEPOSITS
Monthly Statement
Apple…………….
IBM………………
Enron…………..
Amazon……….
Coca-Cola…..
REITs…………..
Microsoft…..
See e.g. 2008-2009
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WHY ARE PONZI SCHEMES DIFFERENT
FROM ORDINARY SECURITIES LITIGATION
Typically, the fraudster is judgment proof. The business:
 Is not a going concern—the business typically was losing money, so there is
no real “company” to sell.
 Has no other assets—scheme failed to generate sufficient revenue, money
was stolen, extensive trading/business losses, etc.
 Has little to no insurance—most insurance policies voided by fraud.
A trustee can file clawback claims (fraudulent conveyance actions) to recover
transfers made to investors up to six years before the insolvency.
 Clawback claims are based on both federal bankruptcy law and state law (see
Uniform Fraudulent Transfer Act)
 An innocent investor is vulnerable to a clawback action because the focus is the
fraudulent intent or insolvency of the transferor.

Generally, once a “Ponzi scheme” or “insolvency” at the time of transfer is established,
the burden shifts to the investor.
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HOW TO PICK UP THE PIECES
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Receiverships (Stanford / Bayou)
Federal District Court / Bankruptcy Trustees (Bayou)
SIPA Liquidations (Madoff)
Government Restitution/Remission Funds (Bayou /
Madoff)
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The Madoff Ponzi Scheme
MADOFF PONZI SCHEME TIMELINE
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1959: Founded as a sole proprietorship of Madoff, Bernard L. Madoff Investment Securities LLC (“BLMIS”) begins operations.
March 1960: BLMIS registers as broker-dealer.
Early 1962: According to interviews with Madoff after his arrest, he and his father-in-law covered up huge BLMIS losses in 1962 caused by Madoff’s improper investment
of client savings in high-risk newly issued stocks.
1980s: Madoff has since acknowledged that he was using arcane strategies to help larger clients evade income taxes and foreign currency controls in the 1980s.
1986: Madoff establishes BLMIS’ principal place of business until its collapse at 885 Third Avenue, New York, New York.
1987: According to Madoff, he began covering numerous withdrawals after the 1987 market crash with deposits from new fund clients.
Early 1990s: By this time, available evidence suggests that BLMIS was falsifying whole portfolios of securities. Madoff admits in his allocution that “[t]o the best of my
recollection, my fraud began in the early 1990s.”
1998: In a prison interview after his arrest, Madoff states, “[b]y 1998, I realized I was never going to get out of this. . . . That’s when I acknowledged the fact to myself that
the ax was going to fall on me eventually.”
January 2001: BLMIS forms as a New York limited liability company wholly owned by Madoff.
August 2005: CEO Samuel Israel III reveals the Bayou Group Ponzi scheme. Skepticism of consistently high-yield funds increases.
September 2006: BLMIS registers as an investment advisor.
January 2008: BLMIS files a Uniform Application for Investment Adviser Registration with the SEC, representing that BLMIS had 23 customer accounts and $17.1 billion
in assets under management.
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According to the Trustee, BLMIS actually had approximately 4,900 active client accounts with a purported value of approximately $65 billion under management.
December 11, 2008: Madoff arrested by federal agents for violation of the criminal securities laws, including inter alia, securities fraud, investment adviser fraud, and mail
and wire fraud.
March 12, 2009: Madoff admits to his fraudulent scheme and pleads guilty to 11 felony counts. United States v. Madoff, No. 09-CR-213 (S.D.N.Y. March 12, 2009)
(Docket No. 50).
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Madoff admits that he “operated a Ponzi scheme through the investment advisory side of [BLMIS].”
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Madoff asserts: “[a]s I engaged in my fraud, I knew what I was doing [was] wrong, indeed criminal.”
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Madoff admits: “that I never made the investments I promised my clients, who believed they were invested with me in the split strike conversion strategy.”
August 11, 2009: Former BLMIS employee, Frank DiPascali, pleads guilty to participating in and conspiring to perpetuate the Ponzi scheme.

Among other things, DiPascali claimed that a fictitious scheme existed at BLMIS since at least the 1980s.
June 29, 2009: Madoff is sentenced to 150 years in prison.
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Madoff is incarcerated at Butner Federal Correctional Institution in North Carolina; Federal Bureau of Prisons Register #61727-054
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THE MADOFF NETWORK
 Madoff Ponzi Scheme was Unprecedented in
Scope
 Estimated $18 billion in customer losses.
 Over 60,000 persons or entities have claimed to have been harmed by
the fraud.
 Spanning three decades (possibly more?).
 International in scope.
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THE MADOFF NETWORK cont.
 Litigation is International as Well
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Austria
Italy
Bermuda
BVI
Cayman Islands
England
Gibraltar
Ireland
Switzerland
Luxemborg
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ILLUSTRATING THE MADOFF NETWORK
International
MADOFF
Philanthropic
Org
Fund
LP
Feeder Fund
LLC
Fund
Fund
Feeder Fund
LP
Direct
Investor
Family Investment
Vehicle
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Fund
Feeder Fund
LLC
Fund
Feeder Fund
LP
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HOW IS MADOFF DIFFERENT FROM
EARLIER PONZI SCHEMES?
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Governing Law. The Securities Investor Protection Act (“SIPA”) governs because
BLMIS was a registered “broker-dealer” under 15 U.S.C. § 78o(b). SIPA represents
the intersection of Bankruptcy and Securities Law.

Duration. The precise start date of the Madoff Ponzi scheme is subject to dispute,
but some believe that it began as early as the 1980s.
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Scope. The Madoff Ponzi scheme injured a broad spectrum of “customers” including
direct institutional investors, individual investors accessing BLMIS through an
expansive feeder fund network, and a significant number of international investors.
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IMPACT
1)
2)
3)
4)
5)
SIPA
Customer Claims against the Estate
Trustee Claims against Customers
Defenses to the Trustee’s Claims
Limitations on Related Claims
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The Securities Investor Protection Act
(“SIPA”)
SIPA* -- THE INTERSECTION OF
BANKRUPTCY AND SECURITIES LAW

Congress Enacts SIPA in 1970. SIPA was enacted in 1970 in response to a “rash of
failures among securities broker-dealers” that caused significant losses to customers
whose assets “were unrecoverable or became tied up on the broker-dealers’
bankruptcy proceedings.” In re New Times Sec. Servs., Inc., 371 F.3d 68, 84 (2d Cir.
2004).

SIPA Facilitates Liquidation of Failed Broker-Dealers. “The Act creates procedures
for liquidating failed broker-dealers and provides their customers special protections.” In
re: Bernard L. Madoff Inv. Sec. LLC, Case No. 14-27, Dkt. 109-1 at 7 (2d Cir. 2014).

SIPA is the Intersection of Bankruptcy and Securities Law. “Except as otherwise
provided in this Act, the provisions of the Securities Exchange Act of 1934 . . . Apply as
if this Act constituted an amendment to, and was included as a section of, such Act.”
SIPA § 2.
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Customer Property / Net Equity Claims. “SIPA prioritizes the distribution of customer
property in a broker-dealer liquidation. The Act creates a fund of customer property for
priority distribution exclusively among a failed broker-dealer’s customers, and
customers share in the fund proportionally, according to each customer’s ‘net equity.’”
In re: Bernard L. Madoff Inv. Sec. LLC, Case No. 14-27, Dkt. 109-1 at 5.
* SIPA is codified at 15 U.S.C. § 78aaa et seq. Throughout this presentation, we cite to the Act itself, as
amended through P.L. 112-90, and approved January 3, 2012. The Act is available at:
https://www.sec.gov/about/laws/sipa70.pdf.
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When Does SIPA Apply?
Applies:
Does Not Apply:
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BLMIS
 Registered Broker-Dealer. BLMIS had
been a registered broker-dealer since
1960.
 BLMIS Collapses. BLMIS collapsed on
December 11, 2008.
 Madoff Investors = Customers.
Madoff’s direct investors qualified as
“customers” because they had claims
against BLMIS for cash or securities that
BLMIS purportedly held for their benefit.
 SIPC Application. December 15, 2008,
the District Court of the Southern District
of New York grants SIPC’s application to
liquidate BLMIS under SIPA. SEC v.
Madoff, No. 08-10791, Dkt. No. 3
(S.D.N.Y. Dec. 15, 2008).
Through a private right of action.
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Sec. Investor Prot. Corp. v. Barbour, 421 U.S.
412 (1975) (There is no private cause of action
under SIPA. Customers cannot compel SIPC to
initiate a liquidation under SIPA)
If the entity does not have customers in need of
protection.
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S.E.C. v. Sec. Investor Prot. Corp., 758 F.3d
357, 358 (D.C. Cir. 2014) (“[B]ecause the
Antiguan bank, unlike SGC, was not a SIPC
member, SIPC had no ability to initiate measures
directly against the [Antiguan] bank to protect the
property of investors who purchased the bank's
CDs.” Further, “the investors obtained the
Antiguan bank's CDs by depositing funds with the
bank itself, not with SGC (a broker-dealer), and
they thus cannot be considered customers of the
SGC”).
In re Bayou Group, LLC, No. 06-22306
(liquidation of Bayou Funds was not subject to
oversight by SIPC because the Bayou Funds
were not registered broker-dealers, and the
investors in the Bayou Funds were not
“customers” of a broker)
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THE SECURITIES INVESTOR PROTECTION
CORPORATION ("SIPC")
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Congress created SIPC as a nonprofit corporation (not a federal agency) that is charged with administering a fund capitalized by the
brokerage community that is meant to protect customers if their brokerage firm fails. See SIPA §§ 3, 4.
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SIPC is supervised by the SEC. SIPA § 3(a)(2)(B); Sec. Investor Prot. Corp. v. Barbour, 421 U.S. 412, 417 (1975) (“The role of
the SEC in this scheme, insofar as relevant to the present case, is one of ‘plenary authority’ to supervise the SIPC.”).
SIPC membership includes all brokers or dealers who are members of a national securities exchange or are otherwise registered as
brokers or dealers under 15 U.S.C. § 78o(b). SIPA § 3(a)(2)(A).
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Membership currently includes approximately 4,000 securities brokerage firms.
SIPC is funded by its members. 2015 assessment rate = 0.25% of the member’s Net Operating Revenues. Depending on the financial
condition of SIPC, assessments can be as high as ½ of 1% of a member’s net operating revenues. SIPA § 4(d)(1).
SIPA initiates liquidation proceedings when broker is insolvent and unable to meet its obligations. SIPC may ask a court for a
protective decree if SIPC determines that the member “has failed or is in danger of failing to meets its obligations to customers,” the
members customers have claims that cannot be satisfied by SIPC advances, and one of the following conditions is met:
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The debtor consents or fails to contest the protective decree; or
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The court finds that such debtor is (A) insolvent, or unable to meets its obligations as they mature; (B) the subject of a state or
federal proceeding in which a receiver, trustee, or liquidator for the debtor has been appointed; (C) not in compliance with
applicable requirements of the 1934 Act, rules of the SEC or any self-regulatory organization with respect to financial responsibility
or hypothecation of customers’ securities; or (D) is unable to make the computations that are necessary to establish compliance
with financial responsibility or hypothecation rules. SIPC § 5(a)(3), (b)(1).
Consolidation of related liquidations. The filing of a meritorious SIPC application gives the court exclusive jurisdiction over the
member and its property, and requires the court to stay any pending bankruptcy, mortgage foreclosure, equity receivership, or other
proceeding to reorganize, conserve, or liquidate the member. SIPA § 5(b). If the SEC has any action pending against the member, it may,
with SIPC’s consent, be combined with the SIPC proceeding. If no such action is pending, the SEC may intervene as a party to the SIPC
proceeding. Sec. Investor Prot. Corp. v. Barbour, 421 U.S. 412, 416 (1975).
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SIPA TRUSTEE (SIPA § 7)
Bankruptcy Code Governs Most Proceedings: “To the extent consistent with the provisions of this Act, a liquidation proceeding
shall be conducted in accordance with, and as though it were being conducted under chapters 1, 3, and 5 and subchapters I and II
of chapter 7 of title 11 of the [Bankruptcy Code].” SIPA § 6(b).
Trustee for the Estate of BLMIS: Irving H. Picard
Lead Counsel: David J. Sheehan
Under SIPA, the trustee has the power to . . .
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Calculate “net equity” claims of customers
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Claw back fraudulent transfers from customers
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Distribute customer property to eligible customers
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SIGNIFICANT DIFFERENCES FROM
ORDINARY BANKRUPTCY
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Trustee Fees are Paid by SIPC. The Trustee’s fees and costs are paid not by the debtor’s estate, but are
advanced by SIPC. 15 U.S.C. § 78fff-3(b)(2).
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Compensation Requested to Date = $667 million
Customer Property Estate. SIPA superimposes on the Bankruptcy Code a separate customer property
estate that takes priority over the debtor’s general estate.
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SIPC Advances. SIPA guarantees customers a minimum amount of recovery. When a
customer’s ratable share of the recovered customer property is insufficient to satisfy his or her net
equity claim, the customer’s claim is supplemented by SIPC.
 $500,000 or $250,000. SIPC advances to the SIPA trustee up to $500,000 per customer on
a claim for securities, see SIPA § 9(a), and up to $250,000 on a claim for cash, see SIPA §
9(a)(1), (d).
 Madoff Customer Claims = Claims for Securities ($500,000). “SIPA's implementing
regulations bolster the shared view of the Trustee, SIPC, and the SEC that a claimant who
has “written confirmation” that securities have been purchased or sold on his or her behalf
should be treated as a customer with a claim for securities. 17 C.F.R. §§ 300.501(b)(1),
300.502(a)(1).” In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229, 236 (2d Cir. 2011).
 Before and After the Madoff Ponzi Scheme. Prior to 2008, SIPC had cumulatively
advanced $671 million to investors of failed brokerage firms. See SIPC’s Annual Report,
App. I (2007). As of February 6, 2015, SIPC has already committed $824 million to allowed
claims against Madoff Securities.
Remainder to the General Estate.
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If the available “customer property and SIPC advances” are insufficient to satisfy a customer’s full
net equity claim, the customer is “entitled . . . to participate in the general estate” as an unsecured
creditor. SIPA § 8(c)(1).
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Conversely, if any customer property remains “after allocation in accordance with” SIPA's statutory
priorities, those assets “become part of the general estate of the debtor.” SIPA § 8(c)(1).
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LIQUIDATION TIMELINE
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December 11, 2008: Madoff is arrested by the FBI and criminally charged with a multi-billion-dollar securities fraud scheme.
December 11, 2008: SEC files District Court complaint against Madoff and BLMIS alleging fraud through investment advisor activities.
December 12, 2008: SDNY appoints Lee S. Richards, Esq. as the receiver for the assets of BLMIS.
December 15, 2008: SDNY grants SIPC’s application for the liquidation of BLMIS under SIPA. SDNY appoints Irving H. Picard as SIPA trustee for liquidation of BLMIS,
names Baker & Hostetler LLP as Picard’s counsel, removes case to Bankr. SDNY pursuant to SIPA, and removes Lee S. Richards as receiver for BLMIS.
January 2, 2008: Picard sends more than 8,000 claim forms to victims of Madoff Ponzi scheme.
June 9, 2009: Substantive consolidation of estate of Bernard L. Madoff into the SIPA proceeding for BLMIS.
August 5, 2009: SIPC agrees to pay undisputed portion of customer claims up to $500,000.
October 28, 2009: SIPC advances exceed half-billion-dollar mark—more than all prior SIPC advances since SIPA was passed in 1970.
March 1, 2010: Bankr. SDNY upholds Trustee’s “net equity” method for determining eligibility for distributions from the customer fund. (“Net Equity Decision”).
November 1, 2010: Hardship program reinstated and extended.
December 17, 2010: Trustee reaches $7.2 billion settlement agreement with Jeffry Picower ($5 billion to Customer Fund; $2.2 to government as forfeiture).
May 9, 2011: $1 billion settlement with Fairfield Sentry.
July 28, 2011: Tremont settlement increases customer fund by $1.025 billion
August 16, 2011: Second Circuit upholds Trustee’s “net equity” method (“Net Equity Decision”).
October 5, 2011: First pro-rata interim distribution to BLMIS customers with allowed claims.
December 21, 2011: IRS settlement increases customer fund by $326 million.
September 19, 2012: Second pro rata interim distribution to customers with allowed claims.
December 2012: DOJ appoints Richard C. Breeden as Special Master of the Madoff Victim Fund.
March 9, 2013: Third pro rata interim distribution to customers with allowed claims.
October 9, 2013: SIPA Trustee files petition for writ of certiorari with the United States Supreme Court seeking review of lower court decisions regarding banks and their
liability in the Madoff Ponzi scheme.
April 30, 2014: Deadline for claims to the Madoff Victim Fund.
May 5, 2014: Fourth pro rata interim distribution to customers with allowed claims.
August 12, 2014: Bankr. SDNY rules on Motion to Dismiss claims against Ezra Merkin and his Madoff feeder funds (“Merkin Decision”). Merkin Decision defines
“knowledge” and “willful blindness” for the purpose of determining clawback liability.
November 17, 2014: Herald Fund SPC settlement increases customer fund by $497 million.
December 8, 2014: Second Circuit holds that Section 546(e) of the Bankruptcy Code bars Trustee’s clawback claims, except those for actual fraudulent transfer under
§ 548(a)(1)(A).
December 8, 2014: Bankr. SDNY upholds Trustee’s treatment of inter-account transfers for the purpose of calculating “net equity.”
February 6, 2015: Fifth pro rata interim distribution to customers with allowed claims.
February 20, 2015: Second Circuit rejects inflation adjustment to “net equity” calculation. (“Inflation Adjustment Decision”).
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Customer Claims
CUSTOMER CLAIMS
 “Customers” Entitled to Claims against Madoff
Estate
 How to Calculate Customer Claims
 Adjustments for Inflation?
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IS THE CLAIMANT A “CUSTOMER”?
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Only “customers” of a broker-dealer can file claims with the debtor. Sec. Investor Prot. Corp. v. Morgan, Kennedy & Co., 533 F.2d
1314, 1316 (2d Cir. 1976).
“Customer.” The term “customer” of a debtor means “any person . . . who has a claim on account of securities received, acquired, or
held by the debtor in the ordinary course of its business as a broker or dealer from or for the securities accounts of such person for
safekeeping, with a view to sale, to cover consummated sales, pursuant to purchases, as collateral, security, or for purposes of effecting
transfer.” SIPA § 16(2).
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It includes a person who
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has deposited cash with the debtor for the purpose of purchasing securities;
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has a claim against the debtor for cash, securities, futures contracts, or options on futures contracts received, acquired, or held in a portfolio margining
account carried as a securities account pursuant to a portfolio margining program approved by the Commission; and
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has a claim against the debtor arising out of sales or conversions of such securities.
It excludes a person
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whose claim arises out of transactions with a foreign subsidiary of a member of SIPC; or
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whose claim for cash or securities which by contract, agreement, or understanding, or by operation of law, is part of the capital of the debtor, or is
subordinated to the claims of any or all creditors of the debtor, notwithstanding that some ground exists for declaring such contract, agreement, or
understanding void or voidable in a suit between the claimant and the debtor.
For Example:
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Sec. Investor Prot. Corp. v. Morgan, Kennedy & Co., 533 F.2d 1314, 1316 (2d Cir. 1976) (Trust is customer of the debtor;
trustees and beneficiaries are not).
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S.E.C. v. Sec. Investor Prot. Corp., 758 F.3d 357, 368-69 (D.C. Cir. 2014) (Investors were not “customers” because they acted
as lenders by purchasing CDs through an investment fund—i.e., depositing funds into the “capital of the debtor” in exchange for a
promise of repayment.).
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MADOFF’S CUSTOMERS

In re Bernard L. Madoff Inv. Sec. LLC, 708 F.3d 422, 427 (2d Cir. 2013).

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Investors in Madoff feeder funds “do not qualify as BLMIS ‘customers’ under SIPA.”
Only direct investors in BLMIS qualify as “customers” and can receive customer property from the SIPA
trustee.
International
MADOFF
Philanthropic
Org
Fund
LP
Feeder Fund
LLC
Fund
Fund
Feeder Fund
LP
Direct
Investor
Family Investment
Vehicle
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Fund
Feeder Fund
LLC
Fund
Feeder Fund
LP
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THE “NET EQUITY” OF MADOFF'S
CUSTOMERS
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“Net Equity” (SIPA § 16(11)): SIPA provides that a customer's “net equity” is determined by:
 “(A) calculating the sum which would have been owed by the debtor to such customer if the debtor had
liquidated, by sale or purchase on the filing date [of the protective order]—
 (i) all securities positions of such customer ... minus
 (B) any indebtedness of such customer to the debtor on the filing date ...”

Books and Records: SIPA also provides that the trustee should make payments to customers based on “net
equity” insofar as the amount owed to the customer is “ascertainable from the books and records of the debtor or
[is] otherwise established to the satisfaction of the trustee.” SIPA § 8(b) (emphasis added).

But Statute Leaves Open the Precise Methodology: Second Circuit concluded “that the statutory language
does not prescribe a single means of calculating ‘net equity’ that applies in the myriad circumstances that may
arise in a SIPA liquidation.. . . Differing fact patterns will inevitably call for differing approaches to ascertaining the
fairest method for approximating ‘net equity,’ as defined by SIPA.” In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d
229, 235 (2d Cir. 2011).
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“NET EQUITY” cont.
Competing Methods:

Net Investment Method (Trustee)

“Net Equity”: Customer Claim = Deposits – Withdrawals. (i.e., no recovery of amounts above principal)
 Rationale. Any dollar paid to reimburse amounts above principal is a dollar no longer available to pay claims for money
actually invested. No legal effect should be given to Madoff machinations.

Net Losers > Claims Allowed: A customer who withdrew less than she deposited over the course of her investment with Madoff
Securities has a net-equity claim and may be entitled to disbursements from the customer property estate for the amount of that
net equity.

Net Winners > Claims Denied: If the Trustee, having engaged in in the same “netting” process, determines that account
withdrawals exceeded deposits, then that customer’s net equity claim is denied and the Trustee brings an avoidance action to
recover amounts above principal.

Last Statement Method (Customers)

“Net Equity”: Customer claim equals the amount shown on their last BLMIS statement before its collapse (November
2008 Statement).
 Rationale: Customers have a legitimate expectation that their customer statements were accurate; the regulations affirm
this expectation in the context of a “claim for securities.” 17 C.F.R. § 300.502 (“Where the Debtor held cash in an account
for a customer, the customer has a ‘claim for securities’ with respect to any authorized securities purchase: (1) If the Debtor
has sent written confirmation to the customer that the securities in question have been purchased for or sold to the
customer's account[.]”).

Net Losers > Claims Allowed: Anyone with a balance remaining on their last account statement (minus any indebtedness).

Net Winners: No one.
Both Methods Were Applied by Prior Courts. See e.g., In re New Times Sec. Servs., Inc., 371 F.3d 68 (2d Cir. 2004)

Court upheld SIPA Trustee dividing Ponzi scheme victims-claimants into two groups and applying different methods to each group:

(1) Claimants misled to believe they were investing in real mutual funds; and
 Last Statement Method

(2) Claimants who were “fraudulently induced” to buy “shares in bogus mutual funds” that did not exist.
 Net Investment Method
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THE “NET EQUITY” METHOD IN MADOFF

Second Circuit Decision: Net Investment Method applies.

In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229 (2d Cir. 2011).
 Books and Records Demonstrate that Last Statement is a Fiction. Net equity is calculated by reference to the
debtor’s book and records, and Madoff’s books and records “reveal that the last statements are fiction,” except for
the “unmanipulated withdrawals and deposits.” Id. at 237-38.
 Net Investment Method is Consistent with SIPA’s Purpose. “Because the main purpose of determining “net
equity” is to achieve a fair allocation of the available resources among the customers, the Trustee properly rejected
the Last Statement Method as it would have undermined this objective.” Id. at 240.
 Last Statement Method Inequitable. Result of last statement method “would be that those who had already
withdrawn cash deriving from imaginary profits in excess of their initial investment would derive additional benefit at
the expense of those customers who had not withdrawn funds before the fraud was exposed.” Id. at 238.
 Distinguishing New Times: “[T]he objecting BLMIS claimants are unlike the appellants in New Times I because
their customer statements reflected investments in real stocks listed on the Standard & Poor's 100 Index. However,
the objecting BLMIS claimants are similarly situated to the New Times appellants in a crucial respect: assessing “net
equity” based on their customer statements would require the Trustee to establish each claimant's “net equity” based
on a fiction created by the perpetrator of the fraud. Id. at 241.
 But the Issue is Still Open for Future Cases: “In holding that it was proper for Mr. Picard to reject the Last
Statement Method, we expressly do not hold that such a method of calculating “net equity” is inherently
impermissible. To the contrary, a customer’s last account statement will likely be the most appropriate means of
calculating “net equity” in more conventional cases.” Id. at 238.
 Clearly Inferior. “It therefore appears to us that in many circumstances a SIPA trustee may, and should, exercise
some discretion in determining what method, or combination of methods, will best measure “net equity.” . . . “[A]
reviewing court could and should accord a degree of deference to such an exercise of discretion so long as the
method chosen by the trustee allocates “net equity” among the competing claimants in a manner that is not clearly
inferior to other methods under consideration.” Id. at 238 n. 5.

Cert. Petition Denied.
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INFLATION ADJUSTMENT




Controlling for the Effects of Inflation. A dollar invested in 1980 is worth more than a dollar invested in 2008.
. . right?
SEC Supports an Inflation Adjustment. SEC agreed that the statute permitted an inflation adjustment and
urged the court to avoid favoring later customers over earlier customers. In re Bernard L. Madoff Investment
Securities LLC, Case No. 14-97, at 11 (2d Cir. Feb. 20, 2015).
Trustee’s Expert’s Calculations. Inflation adjustment would increase allowed claims of early investors by $2.9
billion, and reallocate approximately $575 million to early investors (assuming $10 billion customer property
pool).
Second Circuit Holding. “We conclude that SIPA’s scheme disallows an inflation adjustment as a matter of
law.” In re Bernard L. Madoff Investment Securities LLC, Case No. 14-97, at 16 (2d Cir. Feb. 20, 2015).

Although “SIPA does not address the possibility of an inflation adjustment, . . . [a]n inflation adjustment
goes beyond the scope of SIPA’s intended protections and is inconsistent with SIPA’s statutory
framework.” Id. at 13.
SIPA’s Intended Protections
SIPA’s Statutory Framework
SIPA’s purpose is to “remedy broker-dealer insolvencies—not necessarily
broker-dealer fraud. . . .”
“Net Equity” definition makes no mention of an inflation adjustment.
“Although SIPA defends investors from a broker-dealer’s failure to perform
its custodial role over customer property, it does not otherwise shield
investors from loss. Instead the Act merely restores investors to what their
position would have been in the absence of liquidation.”
Other portions of SIPA do address inflation adjustments. See SIPA § 9(e)
(providing procedures for SIPA to periodically “determine whether an inflation
adjustment to the standard maximum cash advancement amount is
appropriate.”)
“‘SIPA was not designed to provide full protection to all victims of a
brokerage collapse,’ and ‘arguments based solely on the equities are not,
standing alone, persuasive.’” . . . . “The purpose of determining net equity
under SIPA is to facilitate the proportional distribution of customer property
actually held by the broker, not to restore to customers the value of the
property that they originally invested.”
SIPA is likely silent on a “net equity” inflation adjustment because in a typical
broker-dealer failure, “an inflation adjustment would be nonsensical” because
“the securities have values [as of the date of the filing] that already
incorporate economic circumstances such as inflation.”
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Claims against Customers
TRUSTEE'S CLAWBACK POWER

SIPA borrows heavily from the Bankruptcy Code, specifically incorporating the Code’s
avoidance powers:




SIPA § 8(c)(3) (“[T]he [SIPA] trustee may recover any [customer property] transferred by the debtor . . . if
and to the extent that such transfer is voidable or void under the provisions of title 11 of the [Bankruptcy
Code].”);
SIPA § 7(a) (trustee is vested “with the same powers and title with respect to the debtor and the property of
the debtor, including the same rights to avoid preferences, as a trustee in a case under [the Bankruptcy
Code]”);
Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 476 B.R. 715, 722 (S.D.N.Y. 2012),
supplemented (May 15, 2012) (“SIPA expressly incorporates the limitations Title 11 places on trustee’s
powers, including §546(e).”).
SIPA also imposes a significant standing limitation: “Whenever customer property is not
sufficient to pay in full the [customers’ allowed net equity claims and reimbursement of certain, but
not all, types of SIPC advances], the trustee may recover any property transferred by the debtor
which, except for such transfer, would have been customer property if and to the extent that such
transfer is voidable or void under the provisions of Title 11.” SIPA § 8(c)(3) (emphasis added).
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THE MADOFF TRUSTEE’S CLAWBACK
CLAIMS



The Trustee sued the customers to recover billions of dollars in account withdrawals from Madoff Securities.
Good Faith Defendants (and their Subsequent Transferees):

11 U.S.C. §§ 547(b), 550, and 551. Seeking avoidance and recovery of full amount of preference payments made during the
90 days preceding the liquidation;

11 U.S.C. §§ 548(a)(1)(A), 550, and 551. Seeking avoidance and recovery of “fictitious profits” portion of fraudulent transfers
made during the two years preceding the liquidation with actual intent to default existing or future creditors;

11 U.S.C. §§ 548(a)(1)(B), 550, and 551. Seeking avoidance and recovery of “fictitious profits” portion of fraudulent transfers
made during the two years preceding the liquidation where BMLIS was insolvent and received less than reasonably equivalent
value; and

11 U.S.C. §§ 544(b), 550, 551, and NY Debtor and Creditor Law. Seeking avoidance and recovery under state law—made
applicable through Section 544(b) of the Bankruptcy Code—of “fictitious profits” portion of fraudulent conveyances made during
the six years preceding the liquidation.
Bad Faith Defendants (and their Subsequent Transferees):

11 U.S.C. §§ 547(b), 550, and 551. Seeking avoidance and recovery of full amount of preference payments made during the 90
days preceding the liquidation.

11 U.S.C. §§ 548(a)(1)(A), 550, and 551. Seeking avoidance and recovery of the full amount of fraudulent transfers made
during the two years preceding the liquidation with actual intent to defraud existing or future creditors;

11 U.S.C. §§ 548(a)(1)(B), 550, and 551. Seeking avoidance and recovery of the full amount of fraudulent transfers made
during the two years preceding the liquidation where BMLIS was insolvent and received less than reasonably equivalent value;

11 U.S.C. §§ 544(b), 550, 551, and NY Debtor and Creditor Law. Seeking avoidance and recovery under state law—made
applicable through Section 544(b) of the Bankruptcy Code—of full amount of fraudulent conveyances made during the six years
preceding the liquidation.

11 U.S.C. §§ 502(b)(1); SIPA §§ 78fff(b), 78fff-1(a), and Fed. R. Bankr. Procedure 3007(b). Statutory or Equitable
Disallowance of Defendant’s net equity claims.

11 U.S.C. §§ 105(a), and 510(c). Equitable Subordination of defendant’s net equity claims.
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Defenses to the Trustee’s Claims
DEFENSES TO THE TRUSTEE'S CLAIMS




11 U.S.C. § 546(e)
The Value Defense
Extraterritoriality
Trustee Standing
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11 U.S.C. § 546(e) AND THE REACH OF
CLAWBACK ACTIONS

546(e) Prohibition. Bankruptcy Code Section 546(e) prohibits a trustee from
recovering stockbroker transfers that are made in connection with securities contracts
or are settlement payments:


“The trustee may not avoid a transfer that is a . . . settlement payment, as defined in section 101 or 741 of
this title, made by . . . a . . . stockbroker . . . or that is a transfer made by . . . a . . . stockbroker . . . in
connection with a securities contract, as defined in section 741(7) . . . that is made before the
commencement of the case, except under section 548(a)(1)(A) of this title.”
Statutory Safe Harbor. 546(e) limits clawback claims except those claims permitted
by Section 548(a)(1)(A) (intentional fraudulent transfer claims under federal law.).
Effectively 546(e) limits these claims to clawback claims for transfers that occurred up
to two years before the date of filing.
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CLAIMS THAT SURVIVE § 546(e)

Claims that
would survive
546(e)
(assuming defendant

lacked actual
knowledge of the fraud)
Good Faith Defendants (and their Subsequent Transferees):

11 U.S.C. §§ 547(b), 550, and 551. Seeking avoidance and recovery of full amount of
preference payments made during the 90 days preceding the liquidation;

11 U.S.C. §§ 548(a)(1)(A), 550, and 551. Seeking avoidance and recovery of “fictitious profits”
portion of fraudulent transfers made during the two years preceding the liquidation with actual
intent to default existing or future creditors;

11 U.S.C. §§ 548(a)(1)(B), 550, and 551. Seeking avoidance and recovery of “fictitious profits”
portion of fraudulent transfers made during the two years preceding the liquidation where BMLIS
was insolvent and received less than reasonably equivalent value; and

11 U.S.C. §§ 544(b), 550, 551, and NY Debtor and Creditor Law. Seeking avoidance and
recovery under state law—made applicable through Section 544(b) of the Bankruptcy Code—of
“fictitious profits” portion of fraudulent conveyances made during the six years preceding the
liquidation.
Bad Faith Defendants (and their Subsequent Transferees):

11 U.S.C. §§ 547(b), 550, and 551. Seeking avoidance and recovery of full amount of
preference payments made during the 90 days preceding the liquidation.

11 U.S.C. §§ 548(a)(1)(A), 550, and 551. Seeking avoidance and recovery of the full amount of
fraudulent transfers made during the two years preceding the liquidation with actual intent to
defraud existing or future creditors;

11 U.S.C. §§ 548(a)(1)(B), 550, and 551. Seeking avoidance and recovery of the full amount of
fraudulent transfers made during the two years preceding the liquidation where BMLIS was
insolvent and received less than reasonably equivalent value;

11 U.S.C. §§ 544(b), 550, 551, and NY Debtor and Creditor Law. Seeking avoidance and
recovery under state law—made applicable through Section 544(b) of the Bankruptcy Code—of
full amount of fraudulent conveyances made during the six years preceding the liquidation.
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546(e) DECISION




546(e) Applies. Second Circuit affirmed application of 546(e) to limit trustee clawback claims. In re Bernard L. Madoff Inv.
Sec. LLC, 773 F.3d 411 (2d Cir. 2014).

“The clawback defendants, having every reason to believe that BLMIS was actually engaged in the business of
effecting securities transactions, have every right to avail themselves of all the protections afforded to the clients of
stockbrokers, including the protection offered by § 546(e).” Id. at 420.

“[B]y enacting § 546(e), Congress provided that, for a very broad range of securities-related transfers, the interest in
finality is sufficiently important that they cannot be avoided by a bankruptcy trustee at all, except as actual fraudulent
transfers under § 548(a)(1)(A). We are obliged to respect the balance Congress struck among these complex
competing considerations.” Id. at 423.
Actual Knowledge Exception to 546(e). Where a trustee alleges defendant had actual knowledge of the fraud, 546(e)
does not apply. In re Bernard L. Madoff Inv. Sec. LLC, 515 B.R. 117, 138 (Bankr. S.D.N.Y. 2014) (“If, however, an initial (or
subsequent) transferee had actual knowledge of Madoff's Ponzi scheme, he cannot avail himself of the § 546(e) safe harbor,
and the Trustee can avoid and recover preferences and actual and constructive fraudulent transfers to the full extent
permitted by state and federal bankruptcy law.”)

Actual Knowledge = High Level of Certainty. The actual knowledge exception is narrowly construed. In re Bernard
L. Madoff Inv. Sec. LLC, 515 B.R. 117, 139 (Bankr. S.D.N.Y. 2014) (“Thus, ‘actual knowledge’ implies a high level of
certainty and absence of any substantial doubt regarding the existence of a fact.”)
$4 Billion Impact. Trustee is claiming that 546(e) ruling has barred a total of $4 billion in clawback claims.
Cert. Petition Filed. Trustee and SIPC each filed petitions for writ of certiorari. Responses are due in early May 2015.
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THE VALUE DEFENSE

The Value Defense. Section 548(c) provides a defense to a clawback claim brought under
Bankruptcy Code § 548(a) to the extent the transferee “takes for value and in good faith.” 11
U.S.C. § 548(c).

Burden of Proof.
 Ordinarily, the transferee bears the burden of proving the defense, and an objective,
reasonable investor standard applies. Christian Bros. High Sch. Endowment v. Bayou No
Leverage Fund, LLC (In re Bayou Group, LLC), 439 B.R. 284, 308, 313 (S.D.N.Y.2010).
 In the case of BLMIS, however, the District Court modified the good faith defense by
requiring the Trustee to plead and prove the transferee's lack of good faith. SIPC v. BLMIS,
2014 WL 1651952, at *5 (S.D.N.Y. Apr. 27, 2014) (“Good Faith Decision”).
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548(c) - VALUE



“Value.” “‘Value’ means property, or satisfaction or securing of a present or antecedent debt of the debtor, but
does not include an unperformed promise to furnish support to the debtor or to a relative of the debtor.” 11 U.S.C.
§ 548(d)(2)(A).
 “Debt.” Bankruptcy Code defines “debt” as “liability on a claim.” 11 U.S.C. § 101(12).
 “Claim.” “Claim” means “right to payment, whether or not such right is reduced to judgment, liquidated,
unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or
unsecured.” 11 U.S.C. § 101(5)(A).
“Value” = Principal Not Profits.
 Picard v. Greiff, 476 B.R. 715, 725 (S.D.N.Y. 2012) (Any “transfers from Madoff Securities to
defendants that exceeded the return of defendants’ principal . . . Were not ‘for value’” for purposes of
548(c)).
 In re Bayou Grp., LLC (“Bayou IV”), 439 B.R. 284, 337 (S.D.N.Y.2010) (“The pre-judgment interest
remedy does not provide an independent cause of action that accrues to Appellants' benefit at the
moment of redemption.”).
“Value” = Payment in Satisfaction of Claims? In cases involving Ponzi schemes, courts historically held
payments in satisfaction of state law rescission claims are recognized as providing “value” to the estate . . .
 Bayou IV, 439 B.R. at 309 (Defendants “gave value in the form of their initial investments, and have tort
claims of rescission to recover all of their initial investment based on fraudulent inducement.”)
 Donell v. Kowell, 533 F.3d 762, 772 (9th Cir.2008) (“Payments up to the amount of the initial investment
are considered to be exchanged for ‘reasonably equivalent value,’ and thus not fraudulent, because they
proportionally reduce the investors' rights to restitution.”).
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548(c) – VALUE cont.

The Antecedent Debt Opinion. Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC,
499 B.R. 416 (S.D.N.Y. 2013)



Holdings:
 “Value” ≠ Amounts Above Principal. “Claims against the general Madoff Securities estate do not constitute “value”
within the meaning of section 548(c) to the extent that they would be used to withhold fraudulent transfers owing to
the customer property estate under SIPA.” Id. at 430.
 “Value” ≠ Face Value of Inter-Account Transfers. “[P]re-reach-back-period inter-account transfers of amounts
exceeding principal in the account of the sender continue to be fictitious profits, not principal, in the account of the
recipient, and therefore do not constitute antecedent debt for the recipient of the funds.” Id.
Rationale was largely SIPA and it’s definition of “net equity.”
 “Although the Trustee has the same authority to avoid transfers as a bankruptcy trustee, those powers must be
interpreted through the lens of SIPA’s statutory scheme.” Id. at 423.
 “More fundamentally, the definition of net equity and the definition of claims that can provide ‘value’ to the customer
property estate are inherently intertwined . . . .” Id. at 424.
 “The structure of SIPA supports this reading.” Id.
 “[T]his outcome is a logical application of the policy motivating SIPA.” Id. at 425.
But did the court err in relying on SIPA to interpret “value” under the bankruptcy code?
 In re Bernard L. Madoff Inv. Sec. LLC, 773 F.3d 411, 423 (2d Cir. 2014) (“In our earlier decision, we interpreted “net
equity” in a manner that would harmonize it with the SIPA statutory framework as a whole. . . . Section 546(e),
however, is part of the Bankruptcy Code, not SIPA, and was not in issue in [the Net Equity Decision]. This is
important because, in enacting the Bankruptcy Code, Congress struck careful balances between the need for an
equitable result for the debtor and its creditors, and the need for finality. . . . We are obliged to respect the balance
Congress struck among these complex competing considerations.”)
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548(c) – GOOD FAITH




“Good Faith”? “The Bankruptcy Code does not define ‘good faith’ and the legislative history related to section 548(c) never defines, and
scarcely addresses, good faith.” In re Bayou Grp., LLC, 439 B.R. 284, 309 (S.D.N.Y. 2010) (internal quotations omitted).
Bankruptcy Good Faith - Objective. Bankruptcy Courts determining whether a transferee acted in good faith will ask: Whether the
alleged “red flag” information would have put a reasonably prudent transferee (objective) on inquiry notice that the debtor was insolvent or
that it had a fraudulent purpose in making the payments to the transferee. Whether the transferee is on inquiry notice is informed by “the
standards, norms, practices, sophistication, and experience generally possessed by participants in the transferee's industry or class.” In
re Bayou Grp., LLC, 439 B.R. 284, 313 (S.D.N.Y. 2010).
SIPA Good Faith - Subjective. “[T]o establish a lack of ‘good faith’ on the part of securities customers under § 548(c) in the context of a
SIPA bankruptcy, the trustee must show that the customer either actually knew of the broker's fraud or ‘willfully blinded’ himself to it.”
Picard v. Avellino, 469 B.R. 408, 412 (S.D.N.Y. 2012); see also Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 516 B.R. 18,
21 (S.D.N.Y. 2014).

This is because under SIPA, the “good faith” standard is subjective rather than objective “because the securities laws do not
ordinarily impose any duty on investors to investigate their brokers, [and] those laws foreclose any interpretation of ‘good faith’ that
creates liability for a negligent failure to so inquire.” Picard v. Avellino, 469 B.R. 408, 412 (S.D.N.Y.2012); accord Picard v. Katz,
462 B.R. 447, 455 (S.D.N.Y. 2011).

“Actual Knowledge” = “‘[A]ctual knowledge’ implies a high level of certainty and absence of any substantial doubt regarding the
existence of a fact.” In re Bernard L. Madoff Inv. Sec. LLC, 515 B.R. 117, 139 (Bankr. S.D.N.Y. 2014).

“Willful Blindness” = “[S]trong suspicion but some level of doubt or uncertainty of the existence of a fact and the deliberate failure
to acquire actual knowledge of its existence.” In re Bernard L. Madoff Inv. Sec. LLC, 515 B.R. 117, 140 (Bankr. S.D.N.Y. 2014).
Principal vs. Profits. The “good faith” issue is not implicated when the Trustee seeks to recover only amounts above principal. Even if
the transfer was received in “good faith,” the transferee did not give “value” for the transfer of net profits, and cannot, therefore, avail
himself of the good faith defense. See Katz, 462 B.R. at 455–56.

The “good faith” issue is, however, implicated where the Trustee seeks to recover the repayment of principal to the transferee
because the transferee gave value to the extent it deposited cash with BLMIS. In re Bernard L. Madoff Inv. Sec. LLC, 515 B.R.
117, 138-39 (Bankr. S.D.N.Y. 2014)
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EXTRATERRITORIALITY DEFENSE

In re Bernard L. Madoff Investment Sec., LLC, No. 1:12-ms-00115-JSR, Dkt. No. 551
(S.D.N.Y. July 7, 2014)

Facts:


Alternative Holdings:



Trustee attempts to claw back subsequent transfers between foreign entities under 11 U.S.C. § 550(a)(2)
(i.e., Madoff > Foreign Feeder Fund > Foreign Investor.) A group of consolidated customers moved to
dismiss the Trustee’s claims to claw back subsequent transfers between two foreign entities. The issue was
withdrawn to the S.D.N.Y. and Judge Rakoff.
550(a)(2) does not apply extraterritorially to transfers between two foreign entities: “The Court concludes
that (1) the application of section 550(a)(2) [(empowering a trustee to claw back subsequent transfers)] here
would constitute extraterritorial application of the statute, and (2) Congress did not clearly intend such an
application.” Id. at 4.
Considerations of international comity would preclude extraterritorial application of 550(a)(2).
“Moreover, given the factual circumstances at issue in these cases, even if section 550(a)(2) could be applied
extraterritorially, such an application would be precluded here by considerations of international comity.” Id.
Result = A Pending Motion to Dismiss. Rakoff noted before concluding his opinion: “[U]nless the Trustee
can put forth specific facts suggesting a domestic transfer, his recovery actions seeking foreign transfers
should be dismissed.” Id. at 19 n. 4. That motion to dismiss is now pending before the Bankruptcy Court.
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TRUSTEE STANDING





Trustee standing to bring a clawback action: “Whenever customer property is not sufficient to pay in full the [customers’ allowed net
equity claims and reimbursement of certain, but not all, types of SIPC advances], the trustee may recover any property transferred by the
debtor which, except for such transfer, would have been customer property if and to the extent that such transfer is voidable or void under
the provisions of Title 11.” SIPA § 8(c)(3) (emphasis added).
Does Picard have standing to bring his clawback actions?

Customer Property (Feb. 6, 2015) = $10.551 billion

Madoff Victim Fund = $4 billion

Allowed Claims = ($13.338 billion)
 Potential Allowed Claims as High as $17.5 billion? Trustee has indicated that total allowed claims could be as high as
$17.5 billion
 Assignment of Allowed Claims to the Trustee. But how many of the allowed claims have been assigned to the Trustee?
See Blumenfeld Settlement.
Timing of Calculation.

Bevill, Bresler. “The date to be used for valuation of the fund of customer property is the SIPA filing date.” Matter of Bevill,
Bresler & Schulman, Inc., 83 B.R. 880, 893 (D.N.J. 1988).
 But the court based its decision largely on SIPA’s purpose and not its plain language.

Picard. “But it has long been held that ‘the fund of customer property shall be valued for the purposes of [SIPA § 8(c)(3)] as of [the
filing date],’” Picard v. Flinn Investments, LLC, 463 B.R. 280, 284 (S.D.N.Y. 2011) (quoting In re Bevill, Bresler & Schulman, Inc.,
83 B.R. at 898).
 Only issue before the court was whether or not to withdraw the reference on the issue.
Current Legal Challenge. Several clawback defendants filed a motion to dismiss, arguing that the Trustee lacks standing at this time.

Intervenors argued that a hearing on the issue of standing should be postponed until “the time of recovery.”
Madoff Prediction. Taking into account (1) investor withdrawals prior to BLMIS’ collapse, and (2) property distributed as part of BLMIS’
Bankruptcy, Madoff predicts in a post-arrest interview that “people who were with me will make better than if they’d been in the market”
during the meltdown of 2008. Will his prediction prove correct?
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Limitations on Related Claims
LIMITATIONS ON RELATED CLAIMS
 In Pari Delicto
 SLUSA
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LIMITATIONS ON TRUSTEE'S COMMON
LAW SECURITIES CLAIMS – IN PARI
DELICTO

In re Bernard L. Madoff Inv. Sec. LLC., 721 F.3d 54 (2d Cir. 2013) - Picard sued several financial institutions in his capacity as
Trustee under SIPA. He brought New York state law claims including unjust enrichment, breach of fiduciary duty, aiding and
abetting fraud, negligence, and contribution. Each claim was alternatively brought on behalf of BLMIS, the Madoff Customers, and
SIPC as subrogree to customer claims. Id. at 57-58, 62.

Claims filed on behalf of BLMIS:
 Majority of Trustee’s claims barred by doctrine of in pari delicto:


Remaining contribution claim denied:


“SIPA provides no right to contribution, and it is settled in this Circuit that there is no claim for contribution unless the operative
federal statute provides one.” Id. at 65.
Claims filed on behalf of Madoff Customers:
 Denied for lack of standing:



BLMIS’ misconduct was imputed to the Trustee because the Trustee “stands in the shoes of BLMIS and may not assert claims
against third parties for participating in a fraud that BLMIS orchestrated.” Id. at 63-64.
A bankruptcy trustee has no standing generally to sue third parties on behalf of the estate's creditors, but may only assert claims
held by the bankrupt corporation itself.
SIPA “does not confer upon SIPA trustees a power, denied all other bankruptcy trustees, to sue third parties on claims that belong
to persons other than the estate.” Id. at 67, 72.
Claims filed on behalf of SIPC:
 Subrogation denied for lack of statutory authority.

Neither SIPA nor its legislative history supported the Trustee’s claim that SIPC was subrogated to the customers’ claims against
the financial institutions. Id. at 74.
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LIMITATIONS ON INVESTORS' COMMON
LAW CLAIMS - SLUSA

The Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) preempts state law
securities class actions. SLUSA provides that no action seeking damages “based upon the
statutory or common law of any State or subdivision thereof” on behalf of more than 50 persons or
a class “may be maintained in any State or Federal court by any private party alleging ... a
misrepresentation or omission of a material fact in connection with the purchase or sale of a
covered security.” 15 U.S.C. § 78bb(f)(1).
 “Covered Security.” A “covered security” is defined as a security that meets the standards
of the Securities Act of 1933. 15 U.S.C. § 78bb(f)(5)(E). “Under § 18(b) of the Securities Act
of 1933, a covered security is one that is ‘listed, or authorized for listing, on [the national
exchanges]’ or that is ‘issued by an investment company that is registered, or that has filed a
registration statement, under the Investment Company Act of 1940.’ ” Romano v. Kazacos,
609 F.3d 512, 520 n. 3 (2d Cir. 2010) (quoting 15 U.S.C. § 77r(b)).
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LIMITATIONS ON INVESTORS' COMMON
LAW CLAIMS – SLUSA'S APPLICATION TO
MADOFF

In re Herald, 730 F.3d 112 (2d Cir. 2013) (J. Rakoff, writing for Second Circuit) - Investors in Madoff Securities
feeder funds brought class actions claims based on state law theories of fraud and breach of fiduciary duties
against two banks that held the Madoff Securities accounts.
 Claims Preempted. Plaintiffs’ claims were preempted by SLUSA because the complaints alleged
“misrepresentation[s] or omission[s] of a material fact in connection with the purchase or sale of a covered
security.’” Id. at 119.


The complaints allege that, as Madoff’s bankers, JPMorgan and BNY had not only ignored “red flags” of fraud, but
also:
 “had actual knowledge that [Madoff Securities] was violating its fiduciary duties and committing fraud.” . . .
 furthered Madoff's fraud by “funnel[ing] hundreds of millions of dollars to Madoff” and Madoff Securities. . . .
 “kept their mouths shut to ensure their own profits at the expense of Plaintiffs and the other members of the
Class.”
 “ignored the evidence of fraud and failed to disclose the fraud” because the bank “was collecting such large
fees”
Investor > Feeder Fund > Madoff > Covered Securities. Interests in feeder funds are not covered
securities, but because Madoff purported to invest in covered securities, SLUSA applied. Id. at 118.
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LIMITATIONS ON INVESTORS' COMMON
LAW CLAIMS – SLUSA – SUPREME COURT
WEIGHS IN

Chadbourne & Parke LLP v. Troice (“Troice”), 134 S. Ct. 1058 (2014) - Investors in four consolidated civil class
actions brought claims against firms, individuals, insurance brokers, and law firms who helped sell certificates of
deposit used to run the Stanford Ponzi scheme. Defendants argued that the investors’ claims were preempted by
SLUSA.
 Investors alleged that that they purchased CDs (uncovered securities), with the understanding that
the Bank would use the proceeds to purchase safe and secure securities (covered securities)
 The investors were told that the CDs were safer than other CDs, could be redeemed at any time, and
that the proceeds would be invested “in safe, secure, and liquid assets.” The investors claimed that
these falsehoods were material to their decision to purchase the CDs.
 SLUSA did not apply because the investors did not allege that the defendants’ misrepresentations
led the victims to buy or to sell (or to maintain positions in) covered securities.
 SLUSA phrase “‘material fact in connection with the purchase or sale’ suggests a connection that
matters. And for present purposes, a connection matters where the misrepresentation makes a
significant difference to someone’s decision to purchase or to sell a covered security, not to purchase
or to sell an uncovered security, something about which the Act expresses no concern.” Id. at 1066.
(emphasis added)
 At most, the complaints “alleged misrepresentations about the Bank’s ownership of covered
securities—fraudulent assurances that the Bank owned, would own, or would use the victims’ money
to buy for itself shares of covered securities . . . Consequently, there is not the necessary “connection”
between the materiality of the misstatements and the statutorily required “purchase or sale of a
covered security” by the victims. Id. at 1071.
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LIMITATIONS ON INVESTORS' COMMON
LAW CLAIMS – SLUSA – SECOND CIRCUIT
REACTS TO TROICE

Second Circuit Denies rehearing based on Supreme Court’s Troice
Decision.


Distinguishing Troice – Stanford victims were never induced to invest in covered
securities; Madoff victims were, albeit through intermediary funds.
 “[T]he closest that the plaintiffs in Troice could get to statutorily defined ‘covered
securities’ was the allegation that Stanford induced purchase of the uncovered
securities by, among other misrepresentations, vague promises that the Stanford
Investment Bank had significant holdings in various covered securities.” In re Herald,
753 F.3d 110, 113 (2d Cir. 2014).
 “Madoff Securities, by contrast, fraudulently induced attempted investments in covered
securities, albeit through feeder funds (not alleged in the instant complaints as anything
other than intermediaries), and the defendant banks are alleged to have furthered that
scheme. Madoff Securities’ victims thus ‘tried to take ... an ownership position in the
statutorily relevant securities,’ i.e., covered securities. That Madoff Securities (a Ponzi
scheme) fraudulently failed to follow through on its promise to place the investments in
covered securities does not in any respect remove this case from the ambit of SLUSA
as defined in Troice.”
Cert. Petition Denied (3/31/2015)
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The MVF: Recovery for “Victims”
GOVERNMENT REMISSION FUNDS



Restitution: Court Managed. Restitution to persons “directly and proximately harmed” by fraud is ordinarily mandatory. See
18 U.S.C. § 3663A(a)(1). In such a case, the Court is authorized to determine a restitution amount and a schedule of victims
and payments at the time of sentencing. Although restitution and forfeiture are separate, and the Court may appropriately
order a defendant to both disgorge his wrongful profits (forfeiture) and repay his victims (restitution), the Government is
authorized to restore forfeited assets to victims by applying such funds to a restitution order entered as part of sentencing.

“Impracticable” Exception (18 U.S.C. § 3663A(c)(3)). There are cases, however, where the Court may determine
that an order of restitution is not appropriate because the “number of identifiable victims is so large as to make
restitution impracticable,” or because the determination of complex issues of fact related to the cause or amount of the
victim’s losses would complicate or prolong the sentencing process to a degree that the need to provide restitution to
any victim is outweighed by the burden on the sentencing process,” 18 U.S.C. § 3663A(c)(3). Where restitution is
found to be impracticable, the Government is authorized to compensate victims through the process of remission
authorized under the forfeiture statutes and related regulations.
Remission: Attorney General Managed (21 U.S.C. § 853(i); 28 C.F.R. § 9.1 et seq.). 21 U.S.C. § 853(i) authorizes the
Attorney General to “grant petitions for mitigation or remission of forfeiture, restore forfeited property to victims, or take any
other action to protect the rights of innocent victims which is in the interest of justice” and is not otherwise inconsistent with
the forfeiture statutes.

Victim’s Burden to Prove Loss. The victim must satisfactorily demonstrate that: (1) he or she incurred pecuniary
loss of a specific amount; (2) the pecuniary loss was a direct result of the illegal act; (3) the victim did not knowingly
contribute in, participate in, or benefit from, or act in a wilfully blind manner toward the commission of the offense; (4)
the victim has not been compensated for the loss; and (5) the victim does not have recourse to other assets to obtain
compensation. 28 C.F.R. §§ 9.2(v), 9.8(a).
MVF > Remission Fund (18 U.S.C. § 853(i)). The DOJ requested that the Court forego its ordinary restitution process under
18 U.S.C. § 3663A, and permit the Government to proceed via the forfeiture and remission process outlined in 21 U.S.C. §
853(i) and C.F.R. 9.1 et seq. See e.g. United States v. DiPascali, No. 09 Cr. 764, Dkt. Nos. 84, 89 (S.D.N.Y. 2012).
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THE MADOFF VICTIM FUND
DOJ. Attorney General is acting through his delegee, the Chief of the Asset Forfeiture and Money Laundering Section of the
Department of Justice’s Criminal Division

Special Master, Richard C. Breeden (former Chairman of SEC from 1989-1993)
 Appointed in December 2012
 Breeden’s Firm > RCB Fund Services, LLC
Fund = $4 Billion. Approximately $4 billion for distribution

Funds collected from forfeitures to the DOJ obtained in the SDNY in cases related to the Madoff Ponzi scheme.
Claims

63,553 Claims
 21,822 from US residents
 41,731 from foreign nationals

Claimed Losses Exceed $76.654 Billion

Breeden estimates that investors obtained exposure to BLMIS through more than 1,000 different
investment vehicles.
 55% of claims reviewed to date are at least two tiers away from Madoff Securities—i.e., Investor >
Investment Fund > Feeder Fund > Madoff Securities
Relevant Dates

April 30, 2014: Claims deadline

February 2, 2015: 21,000 of the claims have been reviewed (in total there are 3.3 million pages of documents to
review)
 Only 20% of claimed losses in this first set of reviewed claims have been determined ineligible

Eligibility Determination?
 Claimants will receive an Informal Notice of Determination to fix deficiencies
 25% of claimants will receive an Informal Notice before the end of the calendar year (previously
estimated to occur in Q1 2015)
 Formal Notice of Determination (including opportunity to “cure” if necessary)
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OPEN ISSUES


Review of MVF Determinations. Claimants are entitled to reconsideration of an MVF determination under 28 C.F.R. § 9.8(a)(3), and the
ultimate decision is subject to judicial review under the APA.

Broad Discretion. Courts in the Second Circuit have recognized the broad discretion 18 U.S.C. § 853(i) grants the Attorney
General. See e.g. United States v. Gordon, No. 03 CR. 1494 (GEL), 2005 WL 2759845, at *3 (S.D.N.Y. Oct. 19, 2005) (21 U.S.C.
853(i) “grants the Attorney General extraordinarily broad discretion over the handling of forfeited funds.”) aff’d sub nom. DSI
Associates LLC v. United States, 496 F.3d 175 (2d Cir. 2007).

But within Limits of Statutes and Regulations. If the rule was adopted by notice and comment then it is considered a
“legislative rule” binding on the agency and can be changed only with notice and comment. If the agency acts contrary to the rule,
then it has acted contrary to law under the APA. See e.g., Fort Stewart Schs. v. FLRA, 495 U.S. 641, 654 (1990) (“It is a familiar
rule of administrative law that an agency must abide by its own regulations.”).
To be Determined – Reconciling Actual Victim Loss w/ the Justice Department’s Regulations

Who is a Victim?
 The MVF asserts that only the “underlying investors” (i.e., no feeder funds, family investment vehicles, limited partners,
trusts, etc.) are “victims” entitled to remission. The “MVF will look through issues of formal title to determine whose funds
were ultimately lost in the fraud at Madoff Securities.” http://www.madoffvictimfund.com/MVF_Form_IND_v2.pdf.
 But “victim” is defined much broader as “a person who has incurred a pecuniary loss as a direct result of the commission of
the offense underlying a forfeiture.” 28 C.F.R. § 9.2. Moreover, a “person” is defined as “an individual, partnership,
corporation, joint business enterprise, estate, or other legal entity capable of owning property.” Id.

How to Calculate Loss?
 The “MVF will use a ‘cash-in, cash-out’ methodology to measure your loss. We start with all your cash investments in
Madoff Securities and then subtract all your withdrawals. The resulting ‘net investment’ will be your claim, less all
recoveries you have already received, including payments from the SIPC or the bankruptcy trustee.”
http://www.madoffvictimfund.com/Nov18_Letter.shtml.
 But by regulation, the amount of pecuniary loss that can be granted to a victim through remission “is limited to the fair
market value of the property of which the victim was deprived as of the date of the occurrence of the loss. No allowance
shall be made for interest forgone or for collateral expenses incurred to recover lost property or to seek other recompense.”
28 C.F.R. § 9.8(c).
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Our Team
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Bibliography
BIBLIOGRAPHY
Key Judicial Principals and Holdings in Ponzi Scheme Liquidation Proceedings

Purposes of SIPA

In re New Times Sec. Servs., Inc., 371 F.3d 68, 84 (2d Cir. 2004) (SIPA was enacted in 1970 as a response to a “rash of failures
among securities broker-dealers” that caused significant losses to customers whose assets “were unrecoverable or became tied
up on the broker-dealers’ bankruptcy proceedings.”).

In re New Times Sec. Servs., Inc., 463 F.3d 125, 127 (2d Cir. 2006) (“The principal purpose of SIPA is to protect investors
against financial losses arising from the insolvency of their brokers.” (internal quotation marks omitted)).

In re Bernard L. Madoff Inv. Sec. LLC (“Net Equity Decision”), 654 F.3d 229, 239 (2d Cir. 2011) (“It is not at all clear that SIPA
protects against all forms of fraud committed by brokers . . . But it is clear that the statute is not designed to insure investors
against all losses.”).

In re Stratton Oakmont, No. 01–CV–2812, 2003 WL 22698876, at *5 (S.D.N.Y. Nov. 14, 2003) (“SIPA's main purpose [i]s ... not
to prevent fraud or conversion, but to reverse los[s]es resulting from brokers’ insolvency.”)

Sec. Investor Prot. Corp. v. Morgan, Kennedy & Co., 533 F.2d 1314, 1317 (2d Cir. 1976) (SIPA is also intended to “protect
capital markets by instilling confidence in securities traders.”).

Applicability of SIPA

Sec. Investor Prot. Corp. v. Barbour, 421 U.S. 412 (1975) (No private right of action for the customers of a member broker to
compel SIPC to initiate liquidation).

S.E.C. v. Sec. Investor Prot. Corp., 758 F.3d 357, 358 (D.C. Cir. 2014) (“[B]ecause the Antiguan bank, unlike SGC, was not a
SIPC member, SIPC had no ability to initiate measures directly against the [Antiguan] bank to protect the property of investors who
purchased the bank's CDs.” Further, “the investors obtained the Antiguan bank’s CDs by depositing funds with the bank itself, not
with SGC (a broker-dealer), and they thus cannot be considered customers of the SGC”).

Role of SIPC, Trustee, & SEC

Sec. Investor Prot. Corp. v. Barbour, 421 U.S. 412, 417 (1975) (“The role of the SEC in this scheme, insofar as relevant to the
present case, is one of ‘plenary authority’ to supervise the SIPC.”).

Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 499 B.R. 416, 420 (S.D.N.Y. 2013) (Describing in detail the
powers and duties of SIPC trustee)
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BIBLIOGRAPHY cont.




“Customer”

Sec. Investor Prot. Corp. v. Morgan, Kennedy & Co., 533 F.2d 1314, 1316 (2d Cir. 1976) (Trust is customer of the debtor;
trustees and beneficiaries are not).

S.E.C. v. Sec. Investor Prot. Corp., 758 F.3d 357, 368-69 (D.C. Cir. 2014) (Investors were not “customers” because they acted
as lenders by purchasing CDs through an investment fund—i.e., depositing funds into the “capital of the debtor” in exchange for
promise of repayment.).

In re Bernard L. Madoff Inv. Sec. LLC, 708 F.3d 422, 427 (2d Cir. 2013) (Investors in Madoff feeder funds “do not qualify as
BLMIS ‘customers’ under SIPA.”)
“Net Equity”

In re Bernard L. Madoff Inv. Sec. LLC (“Net Equity Decision”), 654 F.3d 229, 236 (2d Cir. 2011) (upholding Trustee’s Net
Investment Method).

In re New Times Sec. Servs., Inc., 371 F.3d 68 (2d Cir. 2004) (calculating “net equity” using the Last Statement Method for
claimants misled into believing they were investing in real mutual funds, but using the Net Investment Method for those
fraudulently induced to invest in “bogus mutual fund”).
Inflation Adjustment

In re Bernard L. Madoff Inv. Sec. LLC, No. 14-509-BK CON, 2015 WL 727965, at *6 (2d Cir. Feb. 20, 2015) (“Under SIPA,
Claimants' net equity claims cannot be adjusted to reflect inflation.”)

Commodity Futures Trading Comm'n v. Walsh, 712 F.3d 735, 754-55 (2d Cir. 2013) (“We see no abuse of discretion in the
district court's approval of the [Equity] Receiver’s Plan without requiring the requested inflation adjustment.”)
Trustee Standing

Matter of Bevill, Bresler & Schulman, Inc., 83 B.R. 880, 893 (D.N.J. 1988) (“The date to be used for valuation of the fund of
customer property is the SIPA filing date.”)

Picard v. Flinn Investments, LLC, 463 B.R. 280, 284 (S.D.N.Y. 2011) (“But it has long been held that ‘the fund of customer
property shall be valued for the purposes of [SIPA § 8(c)(3)] as of [ the filing date],’”)
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BIBLIOGRAPHY cont.


548(c) – “Value”

Christian Bros. High Sch. Endowment v. Bayou No Leverage Fund, LLC (“In re Bayou Group, LLC”), 439 B.R. 284, 308,
313 (S.D.N.Y.2010) (Ordinarily, the transferee bears the burden of proving the defense, and an objective, reasonable investor
standard applies.)

Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC (“Good Faith Decision”), No. 12 Misc. 115, 2014 WL 1651952,
at *5 (S.D.N.Y. Apr. 27, 2014) (In a SIPA proceeding, the trustee bears burden to plead and prove the transferee’s lack of good
faith).

In re Bayou Grp., LLC, 439 B.R. 284, 309 (S.D.N.Y.2010) (Defendants “gave value in the form of their initial investments, and
have tort claims of rescission to recover all of their initial investment based on fraudulent inducement.”)

Donell v. Kowell, 533 F.3d 762, 772 (9th Cir.2008) (“Payments up to the amount of the initial investment are considered to be
exchanged for ‘reasonably equivalent value,’ and thus not fraudulent, because they proportionally reduce the investors’ rights to
restitution.”).

Picard v. Greiff, 476 B.R. 715, 725 (S.D.N.Y. 2012) (Any “transfers from Madoff Securities to defendants that exceeded the return
of defendants’ principal . . . Were not ‘for value’” for purposes of 548(c)).

Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC (“Antecedent Debt Decision”), 499 B.R. 416, 430 (S.D.N.Y.
2013) (“Claims against the general Madoff Securities estate do not constitute “value” within the meaning of section 548(c) to the
extent that they would be used to withhold fraudulent transfers owing to the customer property estate under SIPA.”)
548(c) – “Good Faith”

In re Bernard L. Madoff Inv. Sec. LLC, 515 B.R. 117, 138-39 (Bankr. S.D.N.Y. 2014) (The “good faith” issue is implicated where
the Trustee seeks to recover the repayment of principal to the transferee because the transferee gave value to the extent it
deposited cash with BLMIS.)

In re Bayou Grp., LLC, 439 B.R. 284, 313 (S.D.N.Y. 2010) (Bankruptcy Courts determining whether a transferee acted in good
faith will ask: Whether the alleged “red flag” information would have put a reasonably prudent transferee (objective) on inquiry
notice that the debtor was insolvent or that it had a fraudulent purpose in making the payments to the transferee.)
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BIBLIOGRAPHY cont.
Picard v. Avellino, 469 B.R. 408, 412 (S.D.N.Y. 2012) (“[T]o establish a lack of “good faith” on the part of securities customers
under § 548(c) in the context of a SIPA bankruptcy, the trustee must show that the customer either actually knew of the broker's
fraud or ‘willfully blinded’ himself to it.”)

In re Bernard L. Madoff Inv. Sec. LLC, 515 B.R. 117, 139-40 (Bankr. S.D.N.Y. 2014) (“Thus, ‘actual knowledge’ implies a high
level of certainty and absence of any substantial doubt regarding the existence of a fact. . . . And willful blindness requires a
“strong suspicion but some level of doubt or uncertainty of the existence of a fact and the deliberate failure to acquire actual
knowledge of its existence.”)
Trustee’s Common Law Claims

In re Bernard L. Madoff Inv. Sec. LLC., 721 F.3d 54 (2d Cir. 2013) (majority of Trustee’s common law claims are barred by the
doctrine of in pari delicto).

In re Herald, 730 F.3d 112, 119 (2d Cir. 2013) (J. Rakoff, writing for Second Circuit) (allegations were “more than sufficient to
satisfy SLUSA’s requirement that the complaint allege a ‘misrepresentation or omission of a material fact in connection with the
purchase or sale of a covered security.’” Therefore, plaintiffs’ claims were preempted by SLUSA).

Chadbourne & Parke LLP v. Troice (“Troice”), 134 S. Ct. 1058 (2014) (Where plaintiffs do not allege that the defendants'
misrepresentations led the victims to buy, sell, or to maintain positions in covered securities, SLUSA does not apply.)

In re Herald, 753 F.3d 110, 113 (2d Cir. 2014) (distinguishing fraud in Chadbourne from Madoff Securities Ponzi scheme, and reaffirming In re Herald, 730 F.3d 112).
Inter-account Transfers

Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 499 B.R. 416, 430 (S.D.N.Y. 2013) (“[P]re-reach-back-period
inter-account transfers of amounts exceeding principal in the account of the sender continue to be fictitious profits, not principal, in
the account of the recipient, and therefore do not constitute antecedent debt for the recipient of the funds.”)
546(e)

In re Bernard L. Madoff Inv. Sec. LLC, 773 F.3d 411, 420 (2d Cir. 2014) (“The clawback defendants, having every reason to
believe that BLMIS was actually engaged in the business of effecting securities transactions, have every right to avail themselves
of all the protections afforded to the clients of stockbrokers, including the protection offered by § 546(e).” ).




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BIBLIOGRAPHY cont.



Parallel Government Remission Funds

United States v. Gordon, No. 03 CR. 1494 (GEL), 2005 WL 2759845, at *3 (S.D.N.Y. Oct. 19, 2005) (21 U.S.C. 853(i) “grants
the Attorney General extraordinarily broad discretion over the handling of forfeited funds.”) aff’d sub nom. DSI Associates LLC v.
United States, 496 F.3d 175 (2d Cir. 2007).

Fort Stewart Schs. v. FLRA, 495 U.S. 641, 654 (1990) (“It is a familiar rule of administrative law that an agency must abide by its
own regulations.”).
Bankruptcy Court Jurisdiction

Stern v. Marshall, 131 S. Ct. 2594, 2618, 180 L. Ed. 2d 475 (2011) (“Congress may not bypass Article III simply because a
proceeding may have some bearing on a bankruptcy case; the question is whether the action at issue stems from the bankruptcy
itself or would necessarily be resolved in the claims allowance process.”).
Extraterritoriality

In re Bernard L. Madoff Investment Sec., LLC, No. 1:12-ms-00115-JSR, Dkt. No. 551 (S.D.N.Y. July 7, 2014) (Congress did
not intend for 550(a)(2) to apply extraterritorially, and even if it did, application of that subsequent transfer clawback provision to
transactions between two foreign entities would be precluded by considerations of international comity)
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