Court Blocks Madoff Trustee’s Clawback Bid

Dec 9 2014 | 6:53am ET

With the sixth anniversary of the collapse of Bernard Madoff’s Ponzi scheme approaching, a federal court has rejected a bid to claw back phony profits dating to six years before the fraud fell apart.

The U.S. Second Circuit Court of Appeals in New York yesterday rejected Madoff liquidator Irving Picard’s appeal to seek “fictitious profits” paid out to Madoff clients beginning in 2002. Siding with the lower-court judge, who limited Picard to the two years before Madoff’s fall, the appeals panel said that Picard’s plan to seek more is blocked by bankruptcy law.

“Permitting the clawback of millions, if not billions, of dollars from BLMIS clients—many of whom are institutional investors and feeder funds—would likely cause the very ‘displacement’ that Congress hoped to minimize,” U.S. Circuit Judge Barrington Parker wrote. “The interpretation pressed by the trustee risks the very sort of significant market disruption that Congress was concerned with.”

Picard’s interpretation was that, since Madoff didn’t actually trade any securities, his customers were not protected by the “safe harbor” provision of U.S. bankruptcy law. That rule protects transfers made “in connection with a securities contract;” Picard argued that since the payments made weren’t from securities transactions, but instead from new money coming in from other customers, they were not covered by the rule.

In spite of yesterday’s setback, and others, Picard has recouped some $10.5 billion of the estimated $17 billion lost in the scam.

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