In Re Bernard L. Madoff Investment Securities LLC
2011 U.S. App. LEXIS 16884
| 2d Cir. | 2011Background
- Madoff ran a decades-long Ponzi scheme; SIPA appointed Picard as Trustee for BLMIS liquidation.
- BLMIS customers deposited cash and received fictitious statements; no real securities were purchased or held on customers’ behalf.
- SIPA creates a separate customer property fund and defines net equity, with distributions guided by the trustee and applicable books and records.
- Picard adopted the Net Investment Method (cash deposited minus withdrawals) to calculate each customer’s net equity and fund distributions.
- Some claimants opposed, urging Last Statement Method based on their final account statements reflecting fictitious gains.
- Bankruptcy court upheld Net Investment Method; this Court reviews de novo the trustee’s statutory interpretation and method.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are BLMIS claimants 'customers' under SIPA? | Picard argues yes, as entrusting cash for securities transactions. | Objecting claimants contend they are customers with securities claims or cash claims under SIPA, depending on context. | Yes, customers with claims for securities. |
| What is the proper basis to calculate 'net equity'? | Net Investment Method best reflects net equity per SIPA. | Last Statement Method should be used based on customer statements. | Net Investment Method proper. |
| Does the calculation rely on last statements or debtor books and records? | Books and records support the Net Investment Method as tethered to actual deposits/withdrawals. | Last statements purportedly reflect customer positions that should govern net equity. | Use of last statements rejected; rely on books/records and net investment approach. |
| Are New Times I/II controlling or persuasive? | New Times supports limiting net equity to cash invested, avoiding fictitious profits. | New Times may vary by facts; not controlling here. | New Times precedent is consistent with Net Investment Method in this case. |
| What is the broader SIPA policy impact of the method chosen? | Net Investment Method aligns with protecting investors and market integrity. | Last Statement Method would better reflect perceived investments from statements. | Net Investment Method furthers SIPA goals; avoids rewarding fictitious profits. |
Key Cases Cited
- Sec. Investor Prot. Corp. v. Barbour, 421 U.S. 412 (1975) (SIPA aims to protect investors and market integrity)
- Sec. & Exch. Comm'n v. Packer, Wilbur & Co., 498 F.2d 978 (2d Cir. 1974) (SIPA protection and interpretation under statute)
- New Times Sec. Servs., Inc. v. Baroff, 371 F.3d 68 (2d Cir. 2004) (New Times I—lawful handling of net equity when statements misrepresent reality)
- Sec. Investor Prot. Corp. v. Lehman Bros. Inc., 433 B.R. 127 (Bankr.S.D.N.Y. 2010) (trustee determinations tied to books and records)
- New Times Sec. Servs., Inc. v. Baroff, 463 F.3d 125 (2d Cir. 2006) (New Times II—distinguishes lenders from customers and limits recovery)