Madoff's 'Net Winners' Lose Big on Appeal
(CN) - Two "net winners" in Bernard Madoff's Ponzi scheme cannot intervene in the $7.2 billion forfeiture order against the estate of late investor Jeffry Picower, the 2nd Circuit affirmed.
Months after Madoff's trustee, Irving Picard, brought the fight to recover money from the massive Ponzi scheme to Picower's door, the 67-year-old was found dead in a swimming pool in Palm Beach, Fla., in October 2009.
The $7.2 billion judgment against Picower's estate is largest forfeiture order in U.S. history, and the Southern New York Bankruptcy Court approved a plan in 2011 that gives "net losers" first dibs on the money.
Susanne Stone Marshall and Adele Fox, two allegedly defrauded Madoff's investors, filed parallel class actions against Picower's estate in Florida.
Although Picard allowed Marshall's claim for $30,000, he denied Fox's two claims on the grounds that she was a so-called "net winner" who withdrew more than she deposited.
Fox, an 86-year-old retired school secretary who claims she invested her life savings with Madoff, alleges that Picower gained the $7.2 billion as one of Madoff's co-conspirators.
The bankruptcy court enjoined the "derivative" Florida actions on May 3, 2010, holding that they undermined the court's jurisdiction and violated the Bankruptcy Code's automatic stay provision and the district court's December 2008 order liquidating Madoff's assets.
In December 2010, federal prosecutors announced that Picower's estate returned "every penny" that he made on Madoff's "deplorable" fraud.
Fox nevertheless moved to intervene in Picower's forfeiture the next month, claiming that Picard has denied most of the victims' claims.
Prosecutors replied months later, however, that "the government is highly skeptical of Fox's claim that, as a 'net winner,' she is a victim."
A federal judge ultimately refused to let Fox intervene in May 2011, and in 2012 upheld both the settlement and permanent injunction.
Marshall and Fox appealed, but the 2nd Circuit affirmed the lower court's ruling last week.
The bankruptcy court did not run afoul of Article III of the U.S. Constitution, the three-judge panel ruled, as a fraudulent conveyance claim asserted against "a person who has not submitted a claim against a bankruptcy estate," is a matter of private right, according to the Supreme Court's 1989 decision in Granfinanciera S.A. v. Nordberg.
Marshall and Fox have not alleged "particularized" injuries directly traceable to Picower, the 2nd Circuit held.
"The Picower defendants are alleged to have knowingly reaped the benefits of Madoff's scheme through fraudulent withdrawals, but they are not alleged to have made any misrepresentations to induce investments in [Bernard L. Madoff Investment Securities LLC] BLMIS or to have taken any other actions that could reasonably be understood as aimed at BLMIS customers," Judge Jose Cabranes wrote for the panel.
Marshall and Fox's allegations do not support an independent suit, the ruling states.
"Allegations in the Florida actions of a conspiracy between Madoff and the Picower defendants echo those made by the trustee in his New York action for the recovery of fraudulent transfers," Cabranes wrote. "Although common facts can give rise to multiple claims, the Florida actions impermissibly attempt to 'plead around' the bankruptcy court's injunction barring all 'derivative' claims in that they allege nothing more than steps necessary to effect the Picower defendants' fraudulent withdrawals of money from BLMIS."