In re Bernard L. Madoff Inv. Sec. Llc

Citation55 Bankr.Ct.Dec. 78,654 F.3d 229
Decision Date08 November 2011
Docket Number10–2693–bk(con),10–3675–bk(con). ,10–2694–bk(con),10–3188–bk(con),10–2677–bk(con),10–2685–bk(con),10–2684–bk(con), Docket Nos. 10–2378–bk(L),10–3579–bk(con),10–2718–bk(con),10–2737–bk(con),10–2676–bk(con),10–2679–bk(con),10–2691–bk(con),10–2687–bk(con)
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)


Helen Davis Chaitman, Becker & Poliakoff, LLP, New York, NY, (Peter Schuyler, on the brief), for Appellants Diane and Roger Peskin, et al.Karen E. Wagner, Davis Polk & Wardwell LLP, New York, NY, (Brian S. Weinstein, Jonathan D. Martin, on the brief), for Appellants Sterling Equities Associates, Arthur Friedman, David Katz, Gregory Katz, Michael Katz, Saul Katz, L. Thomas Osterman, Marvin Tepper, Fred Wilpon, Jeff Wilpon, Richard Wilpon, Mets Limited Partnership.Barry R. Lax, Lax & Neville, New York, NY, (Brian Neville, Brian Maddox, on the brief), for Appellants Mary Albanese, et al.Seth C. Farber, Kelly A. Librera, Dewey & LeBoeuf LLP, New York, NY, for Appellant Ellen G. Victor.Carole Neville, Sonnenschein Nath & Rosenthal LLP, New York, NY, for Appellants Marsha Peshkin IRA, Michael and Meryl Mann, Barry Weisfeld.Matthew Gluck, Jonathan M. Landers, Brad N. Friedman, Jennifer L. Young, Milberg LLP, Stephen A. Weiss, Christopher M. Van de Kieft, Parvin K. Aminolroaya, Seeger Weiss LLP, New York, NY, for Appellants The Aspen Company, et al.David B. Bernfeld, Jeffrey L. Bernfeld, Bernfeld, DeMatteo & Bernfeld, LLP, New York, NY, for Appellants Michael Schur and Edith A. Schur.David Parker, Matthew J. Gold, Jason Otto, Kleinberg, Kaplan, Wolff & Cohen, P.C., New York, NY, for Appellants Lawrence Elins, Malibu Trading and Investing, L.P.Stanley Dale Cohen, New York, NY, for Appellants Lee Mellis, Jean Pomerantz, Bonnie Savitt.Jeffrey A. Mitchell, Gibbons, P.C., New York, NY, for Appellant Donald G. Rynne.Daniel M. Glosband, Goodwin Procter LLP, Boston, MA (Larkin M. Morton, Goodwin Procter LLP, New York, NY, on the brief) for Appellants Jeffrey A. Berman, et al.Chryssa V. Valletta, Phillips Nizer LLP, New York, NY, for Appellants Herbert Barbanel, Alice Barbanel.Lawrence R. Velvel, pro se, Andover, MA, for Appellant Lawrence R. Velvel.Josephine Wang, General Counsel, Securities Investor Protection Corporation, Washington, DC (Kevin H. Bell, Senior Associate General Counsel for Dispute Resolution, Christopher H. Larosa, Associate General Counsel, Lauren Attard, Staff Attorney, on the brief), for Appellee Securities Investor Protection Corporation.David J. Sheehan, Baker Hostetler LLP, New York, NY, (Thomas D. Warren, Wendy J. Gibson, Seanna R. Brown, on the brief), for Appellee Irving H. Picard, as Trustee for the Substantively Consolidated Securities Investor Protection Act Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff.Michael A. Conley, Deputy Solicitor for Securities & Exchange Commission, Washington, DC (David M. Becker, General Counsel, Mark D. Cahn, Deputy General Counsel, Jacob H. Stillman, Solicitor, Katharine B. Gresham, Assistant General Counsel, on the brief), for Amicus Curiae Securities & Exchange Commission.Before: JACOBS, Chief Judge, LEVAL and RAGGI, Circuit Judges.DENNIS JACOBS, Chief Judge:

In the aftermath of a colossal Ponzi scheme conducted by Bernard Madoff over a period of years, Irving H. Picard has been appointed, pursuant to the Securities Investor Protection Act, 15 U.S.C. § 78aaa et seq. (SIPA), as Trustee for the liquidation of Bernard L. Madoff Investment Securities LLC, id. § 78eee(b)(3). Pursuant to SIPA, Mr. Picard has the general powers of a bankruptcy trustee, as well as additional duties, specified by the Act, related to recovering and distributing customer property. Id. § 78fff–1. Essentially, Mr. Picard has been charged with sorting out decades of fraud. The question presented by this appeal is whether the method Mr. Picard selected for carrying out his responsibilities under SIPA is legally sound under the language of the statute. We hold that it is. Accordingly, we affirm the order of the United States Bankruptcy Court for the Southern District of New York (Lifland, J.).


The facts surrounding Bernard Madoff's multibillion dollar Ponzi scheme are widely known and were recounted in detail by the bankruptcy court. In re Bernard L. Madoff Inv. Sec. LLC, 424 B.R. 122, 125–32 (Bankr.S.D.N.Y.2010); see also, e.g., In re Beacon Assocs. Litig., 745 F.Supp.2d 386, 393–94 (S.D.N.Y.2010); Anwar v. Fairfield Greenwich Ltd., 728 F.Supp.2d 372, 387, 389–90 (S.D.N.Y.2010); In re Tremont Sec. Law, State Law & Ins. Litig., 703 F.Supp.2d 362, 367–68 (S.D.N.Y.2010). For our purposes, a few facts suffice. When customers invested with Bernard L. Madoff Investment Securities LLC (“BLMIS”), they relinquished all investment authority to Madoff. Madoff collected funds from investors, claiming to invest those funds pursuant to what he styled as a “split-strike conversion strategy” for producing consistently high rates of return on investments.1 J.A. Vol. II at 292. The split-strike conversion strategy supposedly involved buying a basket of stocks listed on the Standard & Poor's 100 Index and hedging through the use of options. However, Madoff never invested those customer funds. Instead, Madoff generated fictitious paper account statements and trading records in order to conceal the fact that he engaged in no trading activity whatsoever. Even though a customer's monthly account statement listed securities transactions purportedly executed during the reporting period and purported individual holdings in various Standard & Poor's 100 Index stocks as of the end of the reporting period, the statement did not reflect any actual trading or holdings of securities by Madoff on behalf of the customer. “In fact, the Trustee's investigation revealed many occurrences where purported trades were outside the exchange's price range for the trade date.” In re Bernard L. Madoff, 424 B.R. at 130. Other now revealed irregularities make it clear that “Madoff never executed his split-strike investment and hedging strategies, and could not possibly have done so.” Id. To point out just two examples, “an unrealistic number of option trades would have been necessary to implement the ... [s]trategy” and “one of the money market funds in which customer resources were allegedly invested through BLMIS ... has acknowledged that it did not even offer investment opportunities in any such money market fund from 2005 forward.” Id.

As is true of all Ponzi schemes, see Cunningham v. Brown, 265 U.S. 1, 7, 44 S.Ct. 424, 68 L.Ed. 873 (1924) (describing the “remarkable criminal financial career of Charles Ponzi), Madoff used the investments of new and existing customers to fund withdrawals of principal and supposed profit made by other customers. Madoff did not actually execute trades with investor funds, so these funds were never exposed to the uncertainties or fluctuations of the securities market. Fictional customer statements were generated based on after-the-fact stock “trades” using already-published trading data to pick advantageous historical prices. J.A. Vol. I at 365–66, 371, 512; J.A. Vol. II at 291, 293. The customer statements documented an astonishing pattern of continuously profitable trades, approximating the profits Madoff had promised his customers, but reflected trades that had never occurred. Although Madoff's scheme was engineered so that customers always appeared to earn positive annual returns, the dreamt-up rates of return Madoff assigned to different customers' accounts varied significantly and arbitrarily. In re Bernard L. Madoff, 424 B.R. at 130. Thus, the customer statements reflected unvarying investor success; but the only accurate entries reflected the customers' cash deposits and withdrawals. J.A. Vol. I at 513.

Madoff's scheme collapsed when the flow of new investments could no longer support the payments required on earlier invested funds. See Eberhard v. Marcu, 530 F.3d 122, 132 n. 7 (2d Cir.2008) (describing typical Ponzi scheme “where earlier investors are paid from the investments of more recent investors ... until the scheme ceases to attract new investors and the pyramid collapses”). The final customer statements issued by BLMIS falsely recorded nearly $64.8 billion of net investments and related fictitious gains. J.A. Vol. I at 505. It is not contended on this appeal that any victim knew or should have known that the investments and customer statements were fictitious. It is unquestioned that the great majority of investors relied on their customer statements for purposes of financial planning and tax reporting, to their terrible detriment.

When Madoff's fraud came to light, the Securities and Exchange Commission filed a civil complaint in the United States District Court for the Southern District of New York, alleging that Madoff and BLMIS were operating a Ponzi scheme.2 The Securities Investor Protection Corporation (“SIPC”), a nonprofit corporation consisting of registered broker-dealers and members of national securities exchanges that supports a fund used to advance money to a SIPA trustee, then stepped in.3 15 U.S.C. § 78ccc; Sec. & Exch. Comm'n v. Packer, Wilbur & Co., 498 F.2d 978, 980 (2d Cir.1974). SIPC filed an application in the civil action seeking a decree that the customers of BLMIS are in need of the protections afforded by SIPA. 15 U.S.C. § 78eee(a)(3)(A). The district court granted SIPC's application; the protective order appointed Mr. Picard as Trustee for the liquidation of the business of BLMIS and the SIPA liquidation proceeding was removed to the bankruptcy court. Id. § 78eee(b)(3)-(4); see also Sec. Investor Prot. Corp. v. BDO Seidman, LLP, 222 F.3d 63, 67 (2d Cir.2000).

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  • Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • March 24, 2021
    ...SIPA prioritizes customer property over the general bankruptcy estate of the broker-dealer. See id.; In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229, 233 (2d Cir. 2011) (the " Net Equity Decision") ("In a SIPA liquidation, a fund of customer property, separate from the general estate of......
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    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • September 16, 2015
    ...a liquidation proceeding of BMIS, pursuant to the Securities Investor Protection Act ("SIPA"). In re Bernard L. Madoff Inv. Sec. LLC ("In re BLMIS I"), 654 F.3d 229, 233 (2d Cir.2011).SIPA establishes procedures for liquidating failed broker-dealers and provides their customers with special......
  • Picard v. Citibank (In re Bernard L. Madoff Inv. Sec.)
    • United States
    • United States Courts of Appeals. United States Court of Appeals (2nd Circuit)
    • August 30, 2021
    ...The details of the Madoff Ponzi scheme[1] are described at length in previous opinions of this Court and others. See, e.g., In re BLMIS, 654 F.3d 229, 231 (2d Cir. 2011) (collecting cases). Madoff operated his Ponzi scheme through his investment firm BLMIS, a securities broker-dealer. A Pon......
  • Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • January 4, 2013
    ...Bankruptcy Court's decision and approved the Trustee's method for determining net equity claims. See generally In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229 (2d Cir.2011). Nonetheless, these decisions have not resolved important issues that avoidance actions raise, and thus they have ......
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5 firm's commentaries
1 books & journal articles
  • The law of Ponzi payouts.
    • United States
    • Michigan Law Review Vol. 111 No. 1, October 2012
    • October 1, 2012
    ...(2.) For a few of the many examples of Ponzi schemes that have filed for bankruptcy, see In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229, 231-33 (2d Cir. 2011); Jobin v. Ripley (In re M & L Bus. Mach. Co.), 198 B.R. 800, 802-04 (D. Colo. 1996); and Merrill v. Abbott (In re Indep. Cl......

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