Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC
476 B.R. 715
S.D.N.Y.2012Background
- Ponzi scheme run by Bernard L. Madoff through Madoff Securities; SIPA trustee Picard seeks to avoid/transfers under 11 U.S.C. §§ 548(a)(1)(A),(B), 550(a) and NY law; cases list Appendix A consented to apply; complaints allege investment advisory unit did not actually trade as claimed while other divisions acted legitimately; account agreements and monthly statements purported to show securities holdings and trades; withdrawals by defendants were transfers allegedly connected to securities contracts under §741(7) and defined securities contracts; defendants argue Rule 12(b)(6) dismissal and §546(e) safe harbor; court previously held §546(e) precludes recovery except for actual fraud
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does §546(e) bar the Trustee’s avoidance claims here? | Picard argues §546(e) bars actions to recover transfers to customers in a Madoff-like Ponzi scheme. | Defendants contend Madoff Securities was not a stockbroker or transfers not in connection with a securities contract. | No; §546(e) applies and bars certain claims, but not all. |
| Are withdrawals here “settlement payments” or transfers in connection with a securities contract? | Picard contends withdrawals are payments completed under securities contracts. | Defendants argue withdrawals were not settlement payments for securities transactions. | Withdrawals constituted settlement payments and/or transfers in connection with securities contracts, under §546(e). |
| Are the transfers for value under §548(d)(2)(A) and §548(c) (good faith) defense? | Picard asserts profits (beyond principal) are not for value and thus recoverable; no good-faith defense. | Defendants claim they received value by satisfaction of an antecedent debt or through book-entry entitlements. | Profits are not for value; §548(c) defense does not apply to profits, but some claims remain viable under §548(a)(1)(A) and §550(a). |
| Does SIPA priority affect value analysis and recoveries for withdrawals? | Withdrawals depleted customer property, affecting net equities and priority under SIPA. | State-law notions of value may apply; some cases treat profits as value. | SIPA priorities control; withdrawals deplete customer property and do not provide value for §548(a)(1)(A) recovery. |
| Do IRC provisions protect IRA withdrawals from avoidance? | IRC minimum distributions protect certain IRA payments from avoidance. | IRC does not apply to avoidances of profits transferred fraudulently. | IRC does not require dismissal; however, findings remain that profits were not for value and IRC does not shield them. |
Key Cases Cited
- Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., 651 F.3d 329 (2d Cir. 2011) (broad §546(e) safe harbor applies to settlement payments in securities transactions)
- In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229 (2d Cir. 2011) (SIPA and fraudulent transfer interplay; net equity priority considerations emphasized)
- Donell v. Kowell, 533 F.3d 762 (9th Cir. 2008) (profits from Ponzi schemes are not for value; offset with net equity principles)
- Sharp Int’l Corp. v. United States, 403 F.3d 43 (2d Cir. 2005) (concepts of fraud and value in fraudulent conveyance context; equity vs creditors considerations)
- Boston Trading Grp., Inc. v. Burnalmaz, 835 F.2d 1504 (1st Cir. 1987) (object of fraudulent conveyance law is to satisfy creditors, not to favor specific ones)