How Long And Strong is Trustee Piccard’s Claw?

On December 10, 2008, Bernard Madoff confessed to his two sons that he had been running what amounted to a massive Ponzi scheme on the scale of approximately $50 billion and that he could no longer sustain it due to, among other things, substantial redemption requests. That night, his sons alerted authorities.

The following day, the Securities and Exchange Commission (SEC) filed a lawsuit in the United States District Court for the Southern District of New York against Madoff and Bernard L. Madoff Investment Securities LLC (Madoff Securities), the registered investment adviser and broker/dealer that fronted Madoff’s activities (the “New York Suit”). The New York Suit requested various types of preliminary relief, including a freeze on the assets of Madoff Securities. The same day, the Office of the United States’ Attorney in the Southern District of New York filed a criminal complaint against Madoff, alleging securities fraud and other criminal wrongdoing.

Madoff Securities is Being Liquidated Pursuant to the Provisions of the Securities Investor Protection Act of 1970

On December 15, 2008, the Securities Investor Protection Corporation (SIPC), asked the federal court presiding over the New York Suit to enter a finding that customers of Madoff Securities needed the protections afforded under the Securities Investor Protection Act of 1970, as amended, 15 U.S.C. §§ 78aaa et seq. (SIPA). The SIPA is a federal statute that regulates broker/dealers and is designed to protect their customers. The SIPA also has detailed procedures for liquidating its members and it also authorizes the creation of an insurance program that is funded, in part, by assessments against SIPC member firms. The fund is designed to protect the customers of brokers or dealers subject to the SIPA from loss in case of financial failure of the member. If the assets in the fund are not adequate to deal with allowable claims against a failed broker/dealer, the SIPA authorizes borrowing from the U.S. Treasury.

The federal court promptly granted the SIPC request, appointed Irving Piccard as the trustee for the SIPA proceeding and transferred to the Bankruptcy Court in New York the legal proceeding to liquidate Madoff Securities. Although the proceedings are being handled in the New York Bankruptcy Court, Madoff Securities is not, technically speaking, in a bankruptcy proceeding. Instead, Madoff Securities is being liquidated pursuant to the provisions of the SIPA. Bankruptcy Judge Burton R. Lifland is presiding over the case. Judge Lifland also presided over the liquidation of another complex and large-scale Ponzi scheme (i.e., paying old investors with money from new investors, instead of profits) known as the Manhattan Investment Fund, Ltd. (the” Manhattan Investment Case”) and has published opinions that disclose some of his views on relevant issues. In that case, a bankruptcy trustee for a fund with approximately $400 million under management that had been operated as a Ponzi scheme sued Bear Stearns in its capacity as a broker to the fund to recover various payments, including margin calls.