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Supreme Court opinion doesn’t help Madoff trustee

Bill Rochelle//March 4, 2014//

Supreme Court opinion doesn’t help Madoff trustee

Bill Rochelle//March 4, 2014//

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The Bernard Madoff trustee, who will try to reinstate hundreds of lawsuits through an appeal to be argued March 5 in Manhattan, had his chances of success dealt a blow last week when the U.S. Supreme Court decided a case involving R. Allen Stanford’s Ponzi scheme.

Madoff trustee Irving Picard is appealing a federal district court decision barring him from suing to recover transfers made more than two years before bankruptcy. Were Picard to succeed on appeal, he might eventually be able to pay defrauded customers in full. Customers’ recoveries currently are in the 56 percent range.

In last week’s decision, called Chadbourne & Parke LLP v. Troice, the Supreme Court ruled in favor of defrauded customers, allowing them to sue firms and individuals who helped sell Stanford’s fraudulent securities. At first blush, Troice seems to help the Madoff trustee because the high court allowed defrauded investors to sue. Looking at the Troice opinion in detail, though, it’s at best unhelpful for Picard and customers who are suing third parties to recover their losses.

Safe harbor

The issue in the Madoff case is the so-called safe harbor in Section 546 of the Bankruptcy Code, which bars some types of suits when they involve transactions in securities. Picard contends the safe harbor doesn’t apply because Madoff never bought a single security with customers’ money.

Troice didn’t deal with the safe harbor. Instead, it turned on the 1998 Securities Litigation Uniform Standards Act, or SLUSA. That statute bars class suits under state law based on a misrepresentation “made in connection with a prior sale of a covered security.” A “covered security” is defined as a security traded on a national exchange.

In the Troice case, Stanford sold investors certificates of deposit issued by an offshore bank. The customers were told the bank would use their money to invest in covered securities.

The U.S. Court of Appeals in New Orleans allowed the Stanford suit to proceed because the customers bought certificates of deposit, which aren’t covered securities.

The Madoff and Stanford cases are similar in that customers’ money wasn’t used to purchase securities. Unfortunately for the Madoff trustee, the Supreme Court’s rationale for allowing the Stanford suits to proceed isn’t helpful.

The Supreme Court said SLUSA didn’t apply to Stanford because “no person actually believed he was taking an ownership position” in a covered security. With Madoff, the customers were told they were buying covered securities, and that’s what their fictitious account statements showed. Indeed, the district judge said the safe harbor was applicable because investors believed they were buying securities.

The Troice decision is possibly the death knell for a lawsuit by investors in feeder funds who in turn invested with Madoff. The investors contend JPMorgan Chase & Co. and Bank of New York Mellon Corp. were aware of Madoff’s fraud and should be held liable because they continued to provide him with banking services. The district court dismissed the suits under SLUSA.

In September, a three-judge panel of the U.S. Court of Appeals in New York invoked SLUSA and upheld dismissal. The investors sought a rehearing by all active judges on the court.

In October, the appeals court said a decision on rehearing would await the Troice decision. Now that the Supreme Court said that SLUSA applies if investors thought they were buying covered securities, Troice suggests Madoff investors have slim a chance of winning rehearing and having their suits reinstated.

During oral argument in the Supreme Court in October in the Troice case, the justices several times asked questions showing an awareness that their ruling would affect Madoff cases working their way up the appellate ladder, in which judges said the ability to sue was curtailed by SLUSA.

This week’s appeal by Picard primarily involves the safe harbor, not SLUSA. The trustee wants the appeals court to focus on how investors’ money was actually invested, not what they were told.

Picard could argue that Troice has no bearing on his appeal because his issue is governed by the safe harbor, where courts may not give the same definition to securities as in SLUSA. He also can contend that just as customers’ expectations about buying securities didn’t carry the day in Troice, they shouldn’t govern in the Madoff case, where no securities ever were bought.


The Madoff firm began liquidating in December 2008 with the appointment of Picard as trustee under the Securities Investor Protection Act. Madoff individually went into an involuntary Chapter 7 liquidation in April 2009, and his case was later consolidated with the investment firm’s liquidation.

He’s serving a 150-year prison sentence following a guilty plea. So far, Picard has recovered about $9.5 billion, or some 56 percent of customers’ investments.

The Supreme Court decision is Chadbourne & Parke LLP v. Troice, 12-00079, U.S. Supreme Court (Washington). Picard’s appeal to be argued this week is Picard v. Ida Fishman Revocable Trust (In re Bernard L. Madoff Investment Securities LLC), 12-02557, U.S. Court of Appeals for the Second Circuit (Manhattan).

The Madoff appeal up for rehearing in the circuit court is Trezziova v. Kohn (In re Herald, Primeo, and Thema), 12-00156, U.S. Court of Appeals for the Second Circuit. The Madoff liquidation in bankruptcy court is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-bk-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The criminal case is U.S. v. Madoff, 09- cr-00213, U.S. District Court, Southern District of New York (Manhattan).

With assistance from Dawn McCarty and Michael Bathon in Wilmington, Del., and Steven Ludsin in New York. 

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