(Adds details from decision, comments, byline)
By Jonathan Stempel
NEW YORK, July 7 A federal judge has limited the
ability of the trustee seeking money for victims of Bernard
Madoff's Ponzi scheme to recoup sums allegedly transferred
fraudulently outside the United States.
In a decision on Sunday, U.S. District Judge Jed Rakoff in
Manhattan said Irving Picard, the trustee liquidating Bernard L.
Madoff Investment Securities LLC, cannot invoke U.S. bankruptcy
law to recover transfers abroad between foreign entities,
including Madoff "feeder funds" and banks.
Rakoff cited a presumption that the law did not apply to
conduct outside the country, pointing to a 2010 U.S. Supreme
Court decision that limited the reach of domestic laws.
According to court records, the decision affects several
dozen lawsuits that Picard has pursued, against defendants such
as Spain's Banco Bilbao Vizcaya Argentaria SA, Bank
Austria AG, Bank of America Corp's Merrill Lynch
International unit and Royal Bank of Scotland Group Plc.
It came six days after the Supreme Court let stand the
dismissal of Picard's claims against banks he accused of
enabling Madoff's fraud.
Amanda Remus, a spokeswoman for Picard, said the trustee is
reviewing Rakoff's decision, which sent the lawsuits to the
Manhattan bankruptcy court for further proceedings.
Picard has recovered about $9.82 billion for former Madoff
customers who lost roughly $17.5 billion of principal.
In April, he said he had filed 82 lawsuits to recover $7.2
billion overall in "subsequent transfers."
AVOIDING ABSURD RESULTS
Many of the cases that Rakoff reviewed involved transfers by
feeder funds that typically funneled customer money to Madoff,
but which sometimes withdrew funds and sent it elsewhere.
In one such case, the trustee sought to recoup $50 million
allegedly transferred to CACEIS Bank Luxembourg by Fairfield
Sentry Ltd and Harley International (Cayman) Ltd, two large
Caribbean-based feeder funds that are now in liquidation.
Picard had argued that allowing such transfers could let
U.S. debtors escape domestic bankruptcy laws by moving billions
of dollars in assets offshore, and then retransferring them.
"To stop the efficacy of the Bankruptcy Code at the borders
would have absurd results," Regina Griffin, a Baker & Hostetler
partner representing Picard, said at a September 2012 hearing.
But Rakoff rejected what he called Picard's "clever"
argument that a different bankruptcy law gave him control over
Madoff property "wherever located and by whomever held."
The judge also said the presumption against applying U.S.
law to non-U.S. conduct may lead to fewer "unintended clashes"
between different countries' laws. He said Picard could try to
invoke other countries' laws to address intentional fraud.
"We are gratified," Franklin Velie, a partner at Sullivan &
Worcester who represented Bank Austria and argued the case for
the defendants, said in an interview. "It is likely to have an
impact in other international bankruptcy cases."
The Ponzi scheme was uncovered in December 2008. Madoff, 76,
pleaded guilty and is serving a 150-year prison term.
The case is Securities Investor Protection Corp v. Bernard
L. Madoff Investment Securities LLC, U.S. District Court,
Southern District of New York, No. 12-mc-00115.
(Reporting by Jonathan Stempel in New York; Editing by Lisa Von
Ahn and Jonathan Oatis)