Madoff Trustee Cleared to Go After Offshore Feeder Funds

MANHATTAN (CN) – The Second Circuit cleared the way Monday for dozens of clawback lawsuits against big banks and the Koch brothers to recoup billions of dollars tied to Bernard Madoff’s massive Ponzi scheme.

As part of his expansive efforts to recoup profits paid out to Madoff investors, bankruptcy trustee Irving Picard argued that the “property of the estate” is legally defined as having no borders, allowing him to target the foreign banks of so-called feeder funds that funneled money from offshore investment clients to Madoff.

The case went to the Second Circuit after U.S. District Judge Jed Rakoff ruled in 2014 that money transferred overseas would be off-limits to Picard — a decision that U.S. Bankruptcy Judge Stuart Bernstein later affirmed.

Vacating that decision Monday, a three-judge panel of the Second Circuit determined that neither the presumption against extraterritoriality nor international comity bars recovery.

 “Madoff Securities is a domestic entity, and the trustee alleges it fraudulently transferred property to the feeder funds from a U.S. bank account,” U.S. Circuit Judge Richard Wesley wrote for the court. “These transfers are domestic activity. Because § 550(a) therefore regulates domestic conduct, these cases involve domestic applications of the statute.”

Wesley noted later that recovery actions against the transfers will necessarily affect the subsequent transferees, but “that consequence should not unfairly surprise them.”

“When these investors chose to buy into feeder funds that placed all or substantially all of their assets with Madoff Securities, they knew where their money was going,” Wesley wrote.

David Sheehan, attorney for Picard at Baker Hostetler, remarked in a statement Monday that the Second Circuit’s holding “not only protects the victims of Madoff’s Ponzi scheme, it adds clarity to the current state of the law and provides a safeguard to protect creditors and investors of a domestic debtor in bankruptcy.”

Baker Hostetler partner Seanna Brown added that the Second Circuit’s decision closed a loophole that threatened the liquidation trustee’s ability to recover funds that had been stolen in New York and then transferred overseas.

The Second Circuit remanded Picard’s lawsuits Madoff to bankruptcy court for further proceedings.

As of Feb. 22, Picard had recovered or reached agreements to recover approximately $13.3 billion, exceeding any prior restitution effort related to Ponzi schemes both in terms of dollars and percentage of stolen funds recovered.

Madoff, 80, has been serving a 150-year prison term in a medium security North Carolina prison since 2009.

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