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Madoff Investors Must Return Profits in Clawback: 2d Cir. (1)

Sept. 24, 2020, 6:30 PMUpdated: Sept. 25, 2020, 2:35 PM

Investors who profited in good faith from Bernie Madoff’s Ponzi scheme must return millions they received in excess of their principal, the Second Circuit ruled, affirming judgments allowing the firm’s liquidating trustee to claw back the funds.

Net winners of Madoff’s infamous Ponzi scheme don’t have property or contract rights to profits earned over and above what they invested, even though they were unaware of Madoff’s fraud, the U.S. Court of Appeals for the Second Circuit ruled Thursday.

Upholding lower court judgments in four consolidated cases brought by trustee Irving Picard, the appeals court found that the fictitious proceeds can’t be shielded under the Securities Investment Protection Act, which functions to return principal to defrauded investors.

The transfers weren’t received in exchange “for value” or entitlement under SIPA, the three-judge panel said. The profits thus aren’t exempt from clawback under the bankruptcy code, it said.

“Concluding otherwise would violate SIPA by permitting a conflicting provision of the Bankruptcy Code to apply and ignoring SIPA’s mandate that customers with net equity claims receive priority over general creditors,” the court said.

By finding that SIPA supersedes the bankruptcy code’s fraudulent transfer provisions, the court raises “serious questions of statutory construction,” said Beth-ann Roth of R|K Invest Law PBC, an attorney for the appealing investors. The ruling also implies that the 1934 Securities Exchange Act contains provisions that create conflicts between protections for investors and fraud victims, she said in an email.

“We do not suggest that those who lost money as a result of the fraud are not entitled to relief,” Roth said. “Rather, the fraudulent transfer statute does not permit the Trustee to obtain those funds from other innocent victims.”

“The trustee is pleased that this long-running dispute has been concluded in his favor, which will allow him to recover additional funds for distribution to Madoff’s customers who still have not recovered their principal,” Seanna Brown of BakerHostetler, an attorney for Picard, said in an email to Bloomberg Law.

Madoff’s investors lost about $20 billion in principal when his securities firm collapsed in 2008. He’s currently serving a 150-year sentence after pleading guilty to fraud.

The liquidating trustee reported that, as of Aug. 21, he has recovered more than $14 billion for defrauded investors.

Judge Robert D. Sack wrote the opinion, joined by judges John M. Walker and Jose A. Cabranes.

R|K Invest Law PBC represented the investor appellants.

The case is In re Bernard L. Madoff Inv. Sec. LLC, 2020 BL 365197, 2d Cir., 19-0429-bk(L), 9/24/20.

(Sept. 24 story updated to include comments from the appealing investors' attorney.)

To contact the reporter on this story: Alex Wolf in New York at

To contact the editor responsible for this story: Laura D. Francis at