(CN) – A Bernie Madoff creditor cannot ditch the bankruptcy process to directly sue UBS for establishing feeder funds that helped Madoff defraud investors of billions, the Second Circuit ruled.
SPV OSUS, a Bahamian company, sued UBS and Access Partners (Suisse) in 2014 after it acquired the creditor rights of Optimal Strategic US Equity Ltd., an investment fund that lost $2.9 billion when Bernie Madoff’s massive $65 billion Ponzi scheme crumbled.
SPV claimed UBS and Access aided and abetted Madoff and his company, Bernard L. Madoff Investment Securities, by sponsoring two European feeder funds that channeled money to Madoff, allowing him to perpetuate his fraud.
A federal judge dismissed the case, however, finding that it is related to the Madoff bankruptcy proceedings, depriving the court of jurisdiction.
The Second Circuit affirmed.
“There is a high degree of interconnectedness between this action and the Madoff bankruptcies: SPV can only proceed on these claims if it establishes that the Madoff fraud occurred,” U.S. Circuit Judge Rosemary Pooler said. “SPV’s assignor invested directly with BLMIS. But for the automatic stay, it is difficult to imagine a scenario wherin SPV would not also sue Madoff and BLMIS, given that SPV alleges that UBS aided and abetted in their fraud.”
Pooler acknowledged that getting a payout from the bankruptcy estate is unlikely, but “it is not impossible.”
The Supreme Court refused to allow BLMIS’s bankruptcy trustee, Irving Picard, to go after major banks, including UBS, HSBC, JP Morgan and others for aiding and abetting Madoff’s fraud, foreclosing a major potential avenue to recover funds for Madoff’s victims.
To date, Picard has recovered approximately $11 billion, of which $9.2 billion has been distributed to defrauded investors.
Further, the New York-based appeals court affirmed that jurisdiction is improper in New York given that the feeder funds were established in Europe by a Swiss bank.
“The connections between the USB defendants, SPV’s claims, and its chosen New York forum are too tenuous to support the exercise of specific jurisdiction,” Pooler said.
Madoff has been serving a 150-year sentence in a North Carolina federal prison since 2009.